Inflation is Not Cooling: What This Means For Gold

On January 19, 2023, former Fed Vice Chair Lael Brainard boldly proclaimed “inflation is cooling.” 

Brainard, whom President Biden named his new top economic advisor less than a month after these statements, may have made the latest misguided inflation soundbite from the Federal Reserve.

If you remember correctly, the Federal Reserve called inflation “transitory” in April 2021, “retired” the word in November 2021, and acknowledged it was too slow to act by May 2022.

Judging by the hotter-than-expected January CPI figures and a deeper look into several facts and figures, Brainard’s “cooling” quote was far more off-base than a simple miscalculation.

What does persistently hot inflation mean for your purchasing power? Is this a precursor for stagflation, or are we already there? Moreover, is 2023 the start of another long-term bull market for gold like in the 1970s? 

 The Latest Inflation Figures Directly Contradict “Cooling” Claims

If inflation is cooling, January 2023’s consumer price index (CPI) did not get the memo. 

Instead of cooling, the CPI rose 6.4% year-over-year, well ahead of market projections of 6.2%. Worse, even though January 2023’s CPI came in slightly lower than December 2022’s 6.5% CPI figure, inflation is not only easing slower than expected. Rather, it may be heating up again, resulting in more Federal Reserve rate hikes than anticipated. 

All it takes is a deeper dive to get particularly concerned. 

First, the CPI increased 0.5% month-over-month in January, an alarming increase from December’s 0.1% month-over-month increase. Shelter costs also increased 0.7% month-over-month, and the core CPI, which excludes volatile food and energy prices, rose for the 32nd straight month.

Moreover, the labor market remains too strong for the Fed to consider slowing its rate hikes. In January 2023, the U.S. economy created 517,000 new jobs, more than double the projected 188,000. With the 10-year Treasury yield approaching 4.0%, the fed funds rate now indicates a peak of 5.29% in July, a nearly 50 bps increase from 4.8% at the beginning of February. 

The Fed, which slowed its last rate hike to 25 bps, may have no choice but to bump it back to 50 bps in March due to this latest inflation data. 

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How Much Longer Could Inflation Last?  

German economist Karl Otto Pöhl once said, “inflation is like toothpaste out of the tube. Once it starts coming out, it is hard to get it back in."  

Unfortunately for the American consumer, the more prolonged inflationary pressures persist, the more entrenched they will become in the broader economy. 

While some temporary factors may contribute to this latest bump in inflation, the continued increase in the CPI and core CPI suggest that underlying inflationary pressures may be more persistent than previously thought. No longer does inflation appear to be driven by temporary factors like supply chain disruptions and transitioning to post-COVID lockdown life. 

According to Bill Smead, chief investment officer at Smead Capital Management, inflation could remain ‘sticky’ for a decade because millennials and Gen Z are entering prime spending years. 

However, inflation could stick around for far more reasons than blaming demographics.  

The Atlanta Fed publishes a version of the CPI tracking “stickier” prices like housing, medical fees, and personal care products. January 2023’s “Sticky CPI” figures came in even hotter than the standard CPI and increased 6.7% year-over-year. This figure was the Sticky CPI's highest since 1982 and an ominous sign that elevated inflation could have legitimate staying power.

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Is Stagflation Here?

No concrete definition determines how long inflation needs to occur for it to be considered stagflation. However, the writing could be on the wall with the Fed backed into a corner after the latest CPI report and stronger-than-expected jobs report.  

In fact, a recent Forbes article stated that the strong job numbers are deceiving and indicate that a “soft landing” is not in the cards. 

When stagflation occurs, the economy experiences inflation, stagnant economic growth, high unemployment, and recessions.

It’s evident by now that inflation won’t magically cool down. But will an economic slump officially hit our economy while inflation remains this elevated? 

It’s possible that a recession, which once seemed like a foregone conclusion, will not happen in 2023. However, consensus estimates still believe there’s a 65% chance of a recession within the next 12 months.   

Plus, the longer the Fed keeps up its rate hikes, the more a soft economic landing appears out of reach.  

A 2022 Piper Sandler report corroborates this sentiment. It reports that a recession followed 8 out of 9 Federal Reserve rate hiking cycles since 1961.

Time will tell if stagflation truly comes, but the signs do not appear promising.  

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The Key Takeaway: Gold’s Upside in This Environment

As inflation remains stubbornly hot and whispers of stagflation become progressively louder, the gold bull case becomes stronger. 

Amid broad economic pessimism and concerns, investors could turn to gold in 2023.

Gold has been a store of value for thousands of years, is a tangible asset not correlated to any currency, and is a finite resource with a limited supply. In times of economic uncertainty, it traditionally serves as a safe haven for anxious investors.

The historical evidence speaks for itself, particularly during the stagflation of the 1970s.  

In August 1971, President Nixon abandoned the gold standard and devalued the U.S. dollar to $35 an ounce of gold. By January 1980, gold’s price soared over 2300% to a record high of $850 an ounce. 

With similar economic catalysts brewing as that record-setting gold run, many have a bullish outlook on the yellow metal. 

UBS, for one, sees gold breaking past $2000 by the end of 2023. Saxo Bank sees it hitting $3,000 and Gov Capital $3,100.

However, the most eye-popping price target comes from Swiss Asia Capital, which sees gold touching $4,000. 

One of the reasons behind this price target, according to Juerg Kiener, managing director, and chief investment officer of Swiss Asia Capital? “Gold is a very good inflation hedge, a great catch during stagflation, and a great addition to a portfolio.” 

For more information about gold and silver as a hedge against inflation, request your free precious metals investor kit from Goldco today.