One Expert Says It’s Time to “Just Accept” Permanently Higher Inflation

Americans are increasingly feeling the pain of higher prices, and they aren’t going away soon. Today we ask, if this level of inflation is the “new normal,” is there anything we can do about it?

One Expert Says It Is Time to Just Accept Permanently Higher Inflation
Composite of original photos by motortion and Ertekmali

From Peter Reagan at <Birch Gold Group

Americans have been plagued by white-hot inflation that erodes both our savings and our purchasing power, leaving us wondering whether we’ll be able to plan for the future.

(In fact, at one point during the last two years, inflation was accelerating at a pace reminiscent of the early 1980s.)

If you’ve been feeling the pinch on your own budget, you’re certainly not alone. Since May 2021, the inflation rate has made the cost of living almost unbearable for most of us. For example, a growing number of Americans are relying on “buy now, pay later” credit for groceries.

You know folks are in rough shape when they’re taking out loans to buy food.

While the latest official update says the inflation rate could finally be easing, the price increases individuals and families have already endured are piling up. In fact, a recent article revealed some incredible findings:

the cost of essentials like groceries, utilities and gas increased by 20% or more. The cost of all items on the index increased by 13%.

milk and bread production have also been affected by the conflict in Ukraine...

The cost of gas is up 22% compared with two years ago.

The cost of utilities has surged since 2021, as a shortage of natural gas and coal drove up prices for electricity and gas piped into homes. Electricity and piped gas are up 21% and 26%, respectively.

The good news? After 24 consecutive months above 5%, inflation rates are finally easing to levels last seen during the financial crisis in 2008.

The financial impact? If you haven’t increased your income by 10% annually for the last two years, you’ve lost a massive amount of purchasing power. Even if you have been fortunate enough to increase your income, you’ve certainly noticed your pay isn’t stretching as far as you’d expect.

This is true for young and old alike – all Americans are struggling right now.

Several different investing vehicles and strategies haven’t been able to keep up either:

  • Bonds had their worst year since 1842, and 401k plans also had a bad year in 2022 (down, on average, nearly 25%).
  • Stable value funds also fall short of the mark, because even though they provide predictable income, they aren’t keeping up with the pace of inflation.
  • The ever-popular 60/40 investing strategy doesn’t appear to be working either. In 2022 alone, this strategy would have made one third of your retirement evaporate.

On top of that, most salaries haven’t kept up with inflation either, because more than half of all companies weren’t able to offer a measly 3% pay raise.

So what should we do? Well, experts aren’t offering helpful advice

“Accept the Fact That Prices Have Increased”

If you’re planning your retirement savings, and are trying to find ways to hedge against inflation, it’s a good bet you don’t want to hear that there just aren’t that many good solutions to the problem.

Lazetta Rainey Braxton, a certified financial planner, didn’t offer much hope:

The best defense against inflation is being true to knowing your necessities and accepting the fact that [prices have] increased.

Knowing your necessities? That seems like sound advice.

Accepting that prices have increased? Frankly, there’s no way to pretend otherwise!

But what should we do about it?

The key is to “be creative,” Braxton said. Homeowners with an extra room might consider renting it out, for example. People can leverage their professional skills, such as graphic design or copywriting, to start a side gig for extra money, and can use websites such as Upwork to help find freelance opportunities.

…oh. We should “be creative” and work more and consider inviting a stranger to move into our homes to share living expenses.

As much as this advice frustrates me, it might actually be all some folks can do. Work more, work harder! Start driving for Uber in the evenings! Have a garage sale!

These are stop-gaps at best. For most of us, our income is limited by our skills and our time – even when we create opportunities to increase that income, if it’s only enough to keep us running in place?

Recently, a customer asked us this question:

Despite the slowdown in inflation, why are consumers still paying more than they were two years ago?

Here’s why: inflation doesn’t stop. Its effects are cumulative, just like credit card debt or an unpaid parking ticket. It just keeps going up.

So as hard as we run in place, there isn’t much hope of keeping up in the long term.

At least things are a little better now – 5% inflation is definitely better than the +9% inflation we saw briefly.

But what if 5% is the new normal?

Strains in the financial system could lead to permanently higher inflation

The recent spate of bank collapses were mostly collateral damage from the Fed’s fight against inflation. Now Wall Street crybabies are whining that, if the Fed means to actually tame inflation, the entire banking system could fail.

Their solution? Like the financial planner above, we should just accept 5% inflation as “the new normal.” Officially, the Fed should move its inflation target from 2% to 5%.

Problem solved!

Obviously, that’s not good for American families – but when has the Federal Reserve cared more about your grocery bill than the banking system?

A shift in the Fed’s inflation target, either as a matter of official policy or an unannounced cease-fire in the inflation fight, might save the banking system.

But it would mean the Fed has chosen to sacrifice our financial futures in favor of short-term stability.

Wolf Richter points out just how brutal such a policy shift would be:

At 4% to 5% core PCE inflation, the Fed won’t cut short-term rates by much if at all, even if it accepts this high inflation as the new normal.

Long-term yields are what really matter for asset prices. They are a bet on long-term inflation. This dream of inflation reverting to 2% in short order is part of what keeps long-term Treasury yields so low. The 10-year Treasury yield is currently at about 3.5%, well below the rate of inflation. Investors buying a 10-year maturity at 3.5% are confidently betting that inflation will revert to 2% shortly.

And if bond markets – including the Treasury market, good grief! – are told by the Fed that core PCE inflation will be 4% to 5% and that core CPI will be at 5% to 6% for years to come, and that everyone will get used to it, and that the Fed will be happy with it, and won’t do anything about it, then the 10-year yield will spike to 6% or 7% to be above this long-term new normal.

With the 10-year yield spiking to 6% or 7% in response to this much higher than expected inflation, the average 30-year fixed mortgage rate will spike to somewhere between 7% and 9%. And stay there.

…bond prices would fall. Commercial real estate prices would fall further, and by a lot, home prices would spiral down. And stocks would take a big hit.

Inflation is about more than just purchasing power – it’s about the bedrock assumption that today’s dollars have some future spending power. Any change in the long-term assumptions about our purchasing power would cause a catastrophic response in all financial markets as hedge funds, institutional investors and Americans saving for retirement adjust their investments to match this “new normal.”

In short, accepting higher inflation would wreck not only the bond market but also the stock and housing markets. And that’s on top of the surging prices on everything from groceries to gasoline.

So what should we do? Just accept a “new normal” of permanently higher inflation and start delivering for GrubHub in the evenings?

Hope for an improvement in the financial system?

Or do something about it?

The highest return on investment of your time

Instead of working more hours, there’s one thing you can do that involves a very limited amount of your time and could pay off much more than freelance work…

Reconsider your financial plan. Diversification is a tried and true (but underrated and misunderstood) strategy for building a sustainable financial plan – especially when planning for retirement. Of course, as we discussed earlier, right now it can be challenging to select the types of investments that protect your savings against inflation.

We’ve spent a lot of time researching and evaluating inflation resistant investments for exactly this reason. There are a number of them, and diversifying your savings in this way could pay massive benefits in the future.

While you’re considering diversifying your savings, it’s a good time to learn more about physical precious metals like gold and silver. Historically, both have proven themselves to be both inflation-resistant assets. During times of financial crisis and uncertainty, gold’s safe haven reputation is second to none.

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