In its simplest form, inflation is the reducing purchasing power of a currency over time due to price rises in essential goods and services that we all need on a regular basis.
Slow and controlled price rises are generally regarded as good economic indicators because increased prices are reflected in increased wages, spending power and standards of living.
Rapid, uncontrolled price inflation is potentially dangerous as it increases the financial burden on households and individuals and, if allowed to go unchecked, can rapidly develop into the sort of hyper-inflation seen in Germany after World War I and more recently in Zimbabwe and Venezuela.
Inflation usually results from increased prices for raw materials and or from the release of pent-up demand for a product or service.
The Covid pandemic has caused huge restrictions on the production of many raw materials on a global scale and as economies start to re-open we are seeing some shortages begin to develop which in turn pushes up prices.
In addition, much of the population of the developed world has spent less in the last eighteen months due to lockdowns and restrictions. There is huge pent-up demand in many sectors that is just starting to be unleashed. Just recall the queues that built up when non-essential retail stores re-opened in the UK.
There are lots of examples of recent price increases, whether real or just perceived, that collectively support the idea that inflation is stirring in the economy and some economists predict that inflation will move above the Bank of England target of 2% by the end of 2021. Only time and the full re-opening of the economy will provide the true picture.
Precious metals, and gold in particular, are acknowledged hedges against inflation. As physical assets, metals prices are determined by markets, priced in US Dollars in the case of gold. US inflation rose to 5% in the year to May. Continuing US inflation will mean that it will cost more Dollars to buy the same amount of gold year on year.
If no other factors were involved, the gold price would rise in US Dollars in line with US inflation, protecting the gold investor from the loss of spending power suffered by those who kept their wealth in cash.
Have you seen prices beginning to rise recently?
Do you see inflation as a concern?
Will you be buying gold to protect your spending power?