Inflation shows it still has teeth

This week's meeting of the Federal Open Market Committee (FOMC - the interest rate-setting unit of America's central bank, the Federal Reserve) may well have been rather fractious, as hawks snapped at doves and vice versa. Somehow they must have reached a consensus but how that was managed when so much contradictory data is around is little less than miraculous.

On Tuesday this week the latest official inflation data for the US was published, which gave some confusing hints about how successful is the Fed's attempt to wrestle inflation into submission. On the one hand the headline annualized inflation rate - the Consumer Price Index (CPI) - in November was 3.1%, marginally lower than October's 3.2%. But core inflation, the CPI minus the price of goods and services went up in November, although admittedly by just 0.3%. The annualized core rate, regarded as an indicator of where inflation is headed in the long-term, remained at 4%, which is twice the Fed's target of annualized 2% inflation. So inflation is slowing, but not fast enough for the Fed to feel comfortable about starting to cut interest rates, currently 5.25%-5.50%. On the other hand there's nothing so horrid about the latest inflation figures that might incline the Fed to push rates higher. Figures for wage growth of 5.2% in the US, 4.7% in the Eurozone and 7.3% in the UK are inconsistent with inflation targets of an annualized 2%, as productivity growth is too weak. And in the US consumers are still spending like there's no tomorrow - a recent Gallup poll found that those surveyed plan on their biggest holiday gift spending since 1999. The US economy at the moment has a kind of 'push-me, pull-you' feel to it.

Within the overall picture a few elements stand out. The core CPI was partly given a leg-up by rents, which rose by 0.5% in November, 0.2% higher than in October. Deducting rents, services inflation went up in November by 0.6%, twice the figure in October. Used auto prices rose by 1.6%, and shelter costs rose by 6.5%, accounting for almost 70% of the annualized rise in core CPI. Inflation in patches remains worrisome.

Taming the tiger

In 2021 the Bank of England's (BoE) chief economist, Andy Haldane, warned that an inflationary tiger had been let loose and might be difficult to tame. His prophecy has come true and is supported by analysis published by the International Monetary Fund (IMF). In September this year the IMF published a working paper which identified more than 100 inflation shock episodes in 56 countries since the 1970s; it found that only in 60% of cases was the tiger tamed within five years. Countries which failed to bring inflation down tended to celebrate prematurely, where inflation declined initially, "only to plateau at an elevated level or re-accelerate." Central bankers everywhere have pushed up interest rates in their struggle to stifle soaring inflation - on average by about 4% in advanced economies, 6.50% in emerging market economies since late 2021.

As a consequence credit risk - the ability of individuals and businesses to pay their debt - has risen. Debt defaults have been increasing; in the UK the BoE said in October that households defaulting on mortgage payments was the highest since 2009. Debt defaults are happening everywhere - in China the number of people blacklisted for missing payments was almost six million in 2020 but now is a record 8.54 million. In the US the corporate debt default rate is almost 5% but could explode to 14% in a worst-case scenario produced by Moody's, the ratings agency. Moody's 'B3N negative and lower' category, a list of distressed debt companies, today has 240 members against 177 a year ago. Globally almost $6 (£4.79) trillion of corporate debt is due for repayment in 2024; how much of that can or will be 'restructured'? And the high cost of credit inevitably knocks back economic growth.

The outlook for gold

The Dollar price of gold has performed remarkably well in 2023, despite the rise in interest rates, which have understandably pulled in a deal of investable funds. Gold for investors is above all a defensive asset, useful as a means of protecting wealth when the purchasing power of fiat currency is eroded by inflation. With Glint, gold is available for use both as money and as an investment asset. That Dollar price spiked higher in early December in a rush of blood prompted by market speculation that the Fed would shortly announce a date for the start of interest rate cuts. This week's inflation news out of the US shows that such talk is premature. The Fed is as aware of the dangers of premature celebrations as the rest of us - no interest rate cuts can be expected until 2024 is well underway, even though politicians seeking election will lean on their central banks to make life easier for those burdened with debt.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn't 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means its purchasing power can decline.