Coming 'Round the Mountain - The Inflation Train's Steady Approach

From around a mountain of federal debt, we can hear the clear approach of the inflation train. The rumbling tracks, the chugging engine, the audible whistle, the brake and hiss, and the familiar squeak of the rails. There is no mistaking it. We have heard it before and not all that long ago.

Based upon April numbers, the pace of US inflation shot up 2% which marks the largest increase since last July. While this may seem like a minor advance, it is actually the fastest rate of inflation growth in years. Energy costs are also higher along with gasoline, food and beef. Rising prices like these could feasibly undermine economic growth if they outpace working wages … making it harder for average Americans to afford the basic, household necessities.

There are various causes of inflation including expansionary monetary policy and accumulated debt. For almost 6 years, the Fed has been engaged in a massive money creation program in an effort to stimulate our troubled economy. It has been the most expensive federal stimulus undertaking in US history.

The Federal Reserve has pumped trillions of dollars into various financial assets including government and corporate bonds from commercial and private banks since late 2008 in an attempt to influence everything from job creation, GDP growth, market activity, interest rates, consumer borrowing and spending, budget short-falls, and overall economic vitality. A dramatic increase in printed money relative to available goods and services, however, can ultimately push all costs higher. And when we have “too much money chasing too, few goods” inflation is the inevitable result.

Inflation can be a decidedly destabilizing force that can undermine the very economic growth that loose monetary policy sought to bring about. It creates uncertainty, reduces buying capacity, slashes spending power, shrinks savings accounts, thwarts investment, and tends to hit those that can least afford it, the hardest. And like a freight train, once it starts to roll, it is very hard to stop.

As inflation picks up steam, interest rates tend to move with it and rising rates mean higher borrowing costs impacting everything from mortgages, to car loans, to credit cards. What can investors do to prepare? First and foremost, consider refinancing your home. Chances are rates won’t stay low for very long so the sooner you “lock-in,” the better. Depending upon your bond allocations, you may want to restructure and realign your holdings. Bonds tend to dive when interest rates rise. Lastly, diversify with hard assets like precious metals. Gold, in particular, has been used as an effective hedge against inflation throughout history. It also stands to benefit from surging global demand as central banks around the world like those in Canada, China, Japan, Russia, and Brazil, are all contending with similar inflationary cycles.

So when inflation does move in, it does so with crushing momentum. Like the approach of a large freight train, it rolls over economies with incredible force. It’s critically important to “get off the tracks” and make a move to protect your money from falling markets, flattening returns, and tumbling values.