News
Why Nobody is Buying the 3% Inflation Story
Your News to Know rounds up the most important stories about precious metals and the overall economy. This week, we'll cover:
- Inflation smolders while Washington weighs another yen intervention
- Jim Rickards says the obvious: Washington doesn’t really care about national debt…
- …so long as it can keep eroding our purchasing power
- Gold has become a mainstay in some pension funds, but is it secure?
Can we trust a gauge that shows 3% inflation?
Expectations of another Federal Reserve rate hike this month have dropped sharply.
Reuters reported that traders now see a 22% chance of an October rate hike, down from about 70% last week.
This comes mostly from a softer inflation reading – specifically, core PCE inflation – that came in at 3.0%, below the 3.3% some economists expected. That detail matters. Core PCE excludes food and energy, which is convenient if you live in a world where nobody eats, drives or heats a home.
The broader PCE price index, which includes food and energy, was running at 3.4%.
The headlines last week were chock-full of “gold selloff.” Yet as I’m writing this, gold is around $4,150 – hardly changed over the past few weeks.
Some are giving gold its due, saying it’s remarkable that the metal is holding its ground while 10-year U.S. government debt yields are near their highest levels since the early 2000s.
Yes, that's a big deal, but is it remarkable?
Who wants U.S. government debt now compared to 2002? I’ll go over that more in my second story, but this is not 2002.
We can’t compare yields in a vacuum. We have to look at the underlying issuer, too.
Investors today have watched the price of gold do incredible (to some) things over the last three to seven years. They know physical gold, owned outright, has no issuer and no counterparty in the way paper claims do. Gold is money, and it has remained money through empires, sovereign defaults, wars, central-bank experiments and more “new eras” than I can count.
What is there to say about, in essence, funding the U.S. government?
Are we as happy to do that now as we were back in 2002, before the debt explosion, before the lockdown-era spending binge, before five and a half consecutive years of sticky inflation? Before the federal government discovered that multi-trillion-dollar deficits can be treated like background noise?
The only big innovation story they’re promising these days is AI – and half the sales pitch seems to be how many jobs it can replace. Friends, I don't know about you, but I've never heard of a nation that grew stronger and wealthier through mass unemployment.
That brings us back to the 3% inflation reading.
I’ve covered plenty about the broad erosion of trust in governments and banks. In the financial system itself. These kinds of readings are one reason why. People simply know something is off.
You don’t need a spreadsheet to see it. Restaurants raise prices and trim portions. Is it just me, or has takeout gotten smaller and blander, too? Most everything has gotten smaller (the technical term is "shrinkflation" which means "same price for less product"). Half the small business owners I know have shut down operations since the lockdowns, driven out of business by rent hikes or rising labor costs or higher input prices.
Since 2020, it feels like every trip to the grocery store reveals a new 15%-25% price hike. Eggs, beef, chocolate, coffee, flour, spices, breakfast cereals, bread, butter... All cost at least 30% more than they did a few years ago. And don't get me started on gas prices!
Not everything. Not all at once. But often enough that the pattern is impossible to ignore.
The cost of living has become one of the dominant voter concerns this year. Proposals that once sounded politically extreme – including government intervention in food prices – are now part of the public debate, according to a recent WSJ poll. Both the Biden and second Trump administrations have launched price-gouging or price-fixing investigations into food production.
Parts of Europe experimented with price caps and food-price interventions in recent years. Hungary is one clear example, and the results have been controversial. Frankly that's not surprising, because research clearly shows that price controls are a bad idea. You know who else had price controls? Venezuela. How'd that work out?
The eurozone itself is hardly an inflation-free paradise. Eurostat reported euro area inflation at 3.8% in September, up from 3.2% in August. Yes, that's even worse than it is here.
So here is my question:
If inflation is "contained," why are everyday working families still describing food prices as an emergency?
That was not the national conversation a decade ago, when reported inflation was closer to 2%-2.5%. Yes, it felt higher than reported even then. But those were the official numbers.
Now we’re supposed to believe 3.4% means the problem is basically under control?
Do you truly feel inflation has fallen back from the official peak above 9% back in 2022?
I don't. And I don't think gold does, either.
To be clear, gold is not a CPI gauge. It does not move neatly with every monthly inflation report. But over long periods, gold is a barometer of confidence in currencies.
In 2022, when official CPI inflation peaked above 9%, gold was about $1,800 an ounce.
Four years later, with “3% inflation,” the price of gold is around $4,100.
Here's my take: Gold seems to be saying what many families already know:
The dollar has not recovered, and it may never recover.
The government’s secret trick to making people poorer
It’s always nice to see coverage of what I’ve been saying, and Jim Rickards recently reiterated how Washington will deal with its debt problem.
Rickards is mostly saying the obvious, which in both our cases is merely data observation.
So which one of us do I quote? Rickards is more famous than I am, but on the other hand this is my column... So I’ll try to be fair.
The U.S. debt pile seems scary at over $40 trillion and counting. It's a lot less frightening when you acknowledge that future debts will be repaid with weaker dollars. Lenders will be repaid, per contract. But the dollars they receive will have less purchasing power than the dollars they lent.
Once you understand that Washington has little incentive to truly repay the debt in purchasing power terms? Then it only becomes scary for U.S. dollar holders.
For the government, it is much cozier.
I recently said it' i's ridiculous that the economy started groaning about a 5% Fed funds rate when Volcker-era rates approached 20% in 1980-81. Five percent is historically normal. It's just that we spent 20 years thinking that all credit would be free forever...
And it’s not just that families can’t handle higher rates the way they once did.
With federal debt above $40 trillion and interest costs consuming an enormous and growing share of the budget, Washington can’t comfortably handle very high rates either.
That is the trap.
The government needs low borrowing costs. Ideally, it wants them near zero. Like they were since the Great Financial Crisis.
Once you understand that lower rates reduce the government’s borrowing costs, the incentive structure becomes painfully obvious.
Then comes inflation.
“Inflation favors the debtor,” Rickards says.
That is the whole mechanism in four simple words.
If you owe a fixed number of dollars, inflation makes those dollars worth less. You repay the debt nominally, but the purchasing power you return is smaller than what you borrowed.
Who is the biggest debtor in the world? In world history?
The federal government of the United States.
Rickards’ point is blunt: Washington does not need to explicitly default if it can repay creditors in weaker dollars that buy less.
Regular readers will recognize the argument immediately.
That is the quiet default.
Not a missed payment, or a dramatic announcement or a line around the block at the bank.
Just a dollar that steadily buys less every year.
Rickards says retirees are especially vulnerable because Social Security cost-of-living adjustments arrive with a lag and often fail to match the actual costs retirees face.
That is exactly right.
A retiree does not live on a theoretical inflation basket. A retiree lives on electricity, insurance, medication, groceries, property taxes, repairs and every other bill that seems to have discovered an elevator button marked “up.”
The biggest victims are those without tangible assets – particularly physical gold and silver.
Rickards also makes the point that physical gold is the gold you actually own. At a time when paper gold contracts, so-called "digital gold" claims and metal-based IOUs are everywhere, that distinction matters.
He also argues Russia has seen more than $150 billion in mark-to-market gains on its gold holdings as prices rose. Now, that does not mean Russia “netted” the gain by selling. It means the value of the gold on its balance sheet rose sharply as the metal climbed. The same would be true for the U.S. gold reserve, if it was marked to market price. (It's almost enough to fund the entire federal government for a whole month!)
That is exactly why governments, central banks and long-term savers keep coming back to gold.
Paper promises change. Even when the promise doesn't, the paper does.
While gold sits there and lets the promises embarrass themselves.
Rickards also mentions the possibility of another U.S. effort to support Japan’s yen, after earlier rare intervention activity. This isn't a simple “bailout,” but the underlying issue is still serious.
When Washington worries about an ally's currency, the problem is bigger than a foreign-exchange headline. It is another sign that the global paper-money system is buckling under the crushing weight of decades of debt.
So when we are told inflation is near 3%, debt is manageable and higher yields make government paper attractive again, I have a really hard time joining the applause.
The math isn't comforting, and the incentives are worse.
Some pension funds have been adding gold since 2020
A recent World Gold Council report covered several pension funds that added or maintained gold allocations after 2020.
That is a positive development.
And since it is positive, let’s start with the positive before moving onto the pressing questions.
The report highlights pension funds in the U.S., U.K., Australia and the Netherlands with gold allocations generally in the 2%-5% range.
These funds are not buying gold because it is shiny. They are buying it because the old assumptions have been shaken.
Inflation returned. Government debt surged. Paper assets no longer behaved the way many managers expected. The traditional retirement playbook came under serious pressure.
Gold earned another look.
Good.
It should have.
This is obviously part of the new era I and many analysts have been pointing out. Gold has moved away from being treated merely as a crisis trade and toward being treated as a basic component of long-term financial resilience.
The World Gold Council report frames these gold allocations as useful for diversification, liquidity and resilience.
That makes sense.
But here is where my gripe begins.
For pension funds, 2%-5% in gold still feels awfully timid in a world of persistent inflation, massive government debt and constant central-bank improvisation.
The right allocation depends on the saver, the institution and the purpose of the money. I am not pretending there is one magic percentage that fits everyone.
But it is not crazy to ask whether 2%-5% is enough.
Pensions are supposed to be about dependability. Safety. Long-term obligations. The money has to be there when retirees need it, not merely when a committee’s model says it should be there.
And pension systems, especially in parts of the U.S., are not exactly famous for rock-solid footing.
So when I see a pension fund allocate 2%-5% to gold, I don’t see some reckless leap into hard money. I see a cautious institution slowly recognizing a reality many private savers understood earlier.
Gold has become harder to ignore.
The report makes a kind of highlight out of the fact that some positions opened during the lockdown era have not been closed.
I don’t know why that should surprise anyone.
Why close a gold position during a time when “the new normal of higher inflation” has become a serious conversation?
Why close it when government debt is above $40 trillion?
Why close it when even official inflation at 3% cuts purchasing power dramatically over time?
With 3% inflation, the dollar loses roughly half its purchasing power in about 24 years. It loses roughly three-quarters in about 48 years.
That is not alarmism.
That is compound math.
So even the optimistic inflation story still leaves us with the dollar melting by design.
That is why I doubt it is necessary to celebrate the fact that pension funds have not closed their gold positions.
The better question is whether they own enough.
And for individual retirement savers, the question is even more direct:
Do you want your exposure to physical precious metals decided entirely by a pension committee, a fund manager or a model built for a world that no longer exists?
That is the nice thing about a Birch Gold IRA. It gives retirement savers a way to consider physical precious metals directly, rather than waiting for a third-party manager to decide whether gold deserves another percentage point.
That does not mean gold solves every retirement problem.
It does not mean gold rises every year.
It does not mean every saver should make the same decision.
But it does mean ordinary Americans have a way to diversify savings with physical precious metals in a world where even large institutions are finally admitting gold belongs in the conversation.
I keep talking about real inflation being higher than many official gauges suggest, but Rickards outlined why that argument is not even necessary.
Even if inflation really were only 3%, the dollar still loses purchasing power year after year.
That is the part officials rarely say plainly.
A little inflation is still inflation.
A slow leak is still a leak.
And if pension funds are starting to treat gold as a normal long-term allocation, not merely a panic button, individual savers should ask what that says about the future of paper money.
The answer is not complicated.
Gold is not holding firm because everyone suddenly forgot about interest rates.
Gold is holding firm because the old explanations are wearing thin.
Inflation is supposedly cooling, but life keeps getting more expensive.
Government debt keeps climbing, but Washington keeps pretending the bill can be managed.
Pension funds are adding gold, but cautiously, as if the fire alarm is only a suggestion.
Maybe that is the right posture for institutions.
For families looking at their own savings, I’m not so sure.
Learn more about how physical gold and silver can help diversify your savings, and request your free Precious Metals Information Kit today.
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About Peter Reagan
Peter Reagan has covered precious metals and the economy for Birch Gold Group for over 15 years. His articles have been featured in several leading publications, including Newsmax and Zerohedge. At Birch Gold Group, Peter leverages his deep market insights to help educate website visitors and customers on why they should consider diversifying their savings into gold and other precious metals, and how that process works. Due to this commitment to education, his content has become a trusted source of information throughout the industry.
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