21 March 2022
First we must define what inflation is. According to www.investopedia.com inflation is a measure of the rate of rising prices of goods and services in an economy. That is probably a good definition of inflation. But, what causes inflation?
Inflation of prices can be caused by a number of things. For example, higher demand can raise prices. So can limiting the supply of an item. Bottom line is that a demand/supply imbalance towards the demand side will cause prices to go up. Likewise a demand/supply imbalance towards the supply side will cause prices to go down.
Economists and others use all kinds of esoteric terms to explain inflation. Why? They do not want the common man to understand how prices work, so they try to make inflation too hard to understand.
Simply put, the economy is nothing more than one gigantic auction. At an auction bidders bid up (inflate) the price of items they want. In a normal auction there is a FINITE amount of money available to bid up (inflate) prices of items up for bid. Once the bidders run out of money, it is NO LONGER POSSIBLE to bid up (inflate) the price of items no matter how hard the auctioneer tries to get higher bids. In the general economy the bidding (inflating) money is INFINITE, only limited by the ability of a government to "print" money.
At a normal auction, when the bidders run out of money, they can no longer bid up (inflate) prices. The same is true in an economy AS LONG AS THE GOVERNMENT DOES NOT INCREASE THE MONEY SUPPLY. When a government makes more money available, prices are GUARANTEED to rise (inflate). If the money supply is doubled, eventually prices will double. It typically takes around two years for an increased money supply to trickle down to consumer inflation. However, price inflation will begin IMMEDIATELY when the money supply is increased, but is generally not visible to the end user at that time.
So, how can inflation be controlled? Quite simple, limit the money supply and prices will automatically be limited. Does anyone really think our government, or any government for that matter, has the political will to stop enriching themselves? No government in history has ever had the discipline to limit the money supply. Every government in history has inflated the money supply until the economy collapsed eventually destroying the country.
To know what prices will be like in two years, just examine what is happening to the money supply today. If the supply of money is doubled today, the general price level will double in about two years. Some prices will double in months while others may take over two years.
A key metric to watch is the M1 indicator the American Federal Reserve uses. Currently (Mar 2022) M1 is FIVE times higher than a year ago. That means in another year, we can expect prices to be FIVE times what they were a year ago. Look at the prices you were paying last year. Multiply those prices by FIVE. That is what can be expected, although a lot of things could happen in the meantime to cause higher or lower prices.
Recently, when Russia invaded Ukraine, parts of the World started blaming Putin for higher energy prices. But is that true? The supply is the same. The demand is the same. So how can that cause inflated prices? It cannot! If Europe does not buy Putin's oil, then Putin will sell it to China. If China buys oil from Putin, then China can buy LESS oil from the Middle East. The Middle East will then have more oil to sell to Europe. Same supply. Same demand. Just different customer relationships.
Never forget that only the money supply determines overall prices. Individual prices constantly go up and down depending on demand/supply imbalances.
Is there any way the common person can stay ahead of inflation? First understand what inflation is. Measuring the value of anything with fiat money is the same as measuring with a rubber yardstick. If you measure with a rubber yardstick, there is no way your measurements can be accurate. Using fake measurements will mean that all decisions based on those measurements will also be wrong.
Second, keep only sufficient fiat money on hand to meet any cash flow needs. Be aware that such money is guaranteed to eventually be worthless. If it is all in a bank, and there is a bank holiday, the depositor is shafted. Can you survive if there is a bank holiday months long? Likewise, cash in a mattress, though readily available, will be subject to theft, either stolen or inflated to nothing.
Third, all other money needs to be invested in hard assets, like land, gold, antiques, parts, or anything else that can be TOUCHED, has a LIMITED supply, and that can be kept in your possession. Downsides are potential theft, limited convertibility, storage costs, environmental degradation, and so on. Hard assets as a group stay in lockstep with inflation and as such are the only guaranteed way to preserve wealth. If these hard assets can be purchased at a discount, then wealth can be increased.
Finally, invest time in learning skills that can be used to trade for items needed should the entire economic system collapse. Those skills may never be needed, but should they be needed but not slready learned, calamity could ensue. In other words, always be prepared for the worst. Sooner or later the worst always happens.