Not Even Trump Can Clean Up This Mess

by Doug Casey, Casey Research:

Higher prices are coming to a store near you…

For the first time in years, inflation is picking up.

Inflation measures how quickly prices for everyday goods and services rise. The higher the inflation rate, the quicker prices rise.

Most people don’t like inflation. It means they have to spend more money on groceries, gas, and rent.

Luckily, we haven’t had much of it recently. The Consumer Price Index (CPI)—the government’s favorite measure of inflation—has averaged just 1.4% since 2009. That’s less than half its historical average of 3.5%.

• But inflation started picking up last summer…

It’s now rising at the fastest rate in five years. MarketWatch reported last week:

A string of sharp gains since late summer helped drive up inflation by 2.1% for the full year, marking the biggest increase since a 3% gain in 2011. Americans are pay[ing] more for fuel, housing and doctor visits, countering the biggest decline in grocery prices since the tail end of the Great Recession.

In 2015, we had an annual inflation rate of just 0.7%. In other words, prices for everyday goods and services are rising three times faster than they were two years ago.

• Inflation will likely keep rising…

The chart below shows forward-looking inflation expectations for the next five years. You can see that economists expect inflation to average at 2% between now and 2022.

This might not seem like a big deal. After all, inflation topped 14% during the early 1980s. We’re nowhere near that.

But you have to understand something…

• All we’ve been hearing about since the last financial crisis is deflation…

Deflation is the opposite of inflation. It’s when prices fall.

It sounds like the best thing ever. After all, who doesn’t like saving money?

But central bankers don’t think about deflation like we do. They see it as a sign of a weak economy.

• The Federal Reserve has been doing everything it can to prevent deflation…

Since 2008, it’s printed more than $3.5 trillion out of thin air. And it’s held its key interest rate near zero for nearly a decade.

We’ve said many times before that these reckless policies would eventually generate inflation. We’re finally starting to see that happen.

• Most investors aren’t ready for inflation…

They own too many bonds.

That’s because bonds have been in a bull market since the 1980s. Many people now see bonds as “no-brainer” investments.

We also have had almost no inflation the past few years. And bonds are a great investment when there’s little or no inflation.

Let’s say you own a bond that yields 2%. If there’s no inflation (0%), your “real” return (a bond’s yield minus inflation) would be 2%.

Now, let’s say the inflation rate jumps to 2%. Here your real return would be 0%. You wouldn’t make any money on that bond.

If inflation hit 3%, your real return would drop to -1%. You would actually lose money on that bond.

In other words, bonds are the last thing you want to own when inflation is high or likely to rise.

Read More @ CaseyResearch.com