June 14, 2023


A Different Perspective on Inflation: Figures & Gold Prices

As the US economy churns in the turmoil of a volatile market this week, a significant point of contention lies in the area of inflation. It is, in some analyst circles, a popular belief that the government is manipulating the statistics to understate the real inflation figures. Michael Wilkerson, CEO and Founder of Stormwall Advisors and Author of "Why America Matters: The Case for a New Exceptionalism," has raised serious concerns about the reliability of the Consumer Price Index (CPI), the official measure of inflation, which is provided by the Bureau of Labor Statistics in a recent interview.

Wilkerson suggests that the actual inflation rates, especially in the categories of food, electricity, higher education, and medical care, are two to three times higher than what the CPI data reports. He bases these assertions on data from non-government sources like The Brookings Institution and PricewaterhouseCoopers (PwC).

In light of these claims, it is important to question the CPI data's reliability and the potential implications of this discrepancy on commodities like gold. 

Unmasking the Real Inflation Rate

Official CPI data implies a yearly increase in healthcare costs by 2.6 percent over the last decade. However, data from PwC suggests a much steeper annual rise, pegging it at 7.6 percent since 2006. The disparity between the two figures is significant, and it is these sorts of inconsistencies that have led to skepticism about the CPI's validity.

Recently, the CPI release indicated a year-over-year inflation of 4 percent in May 2023, a decrease from 4.9 percent in April. This rate is significantly lower than the 9.1 percent inflation seen in June 2022. However, according to Wilkerson, the real inflation, as indicated by the CPI, might reach as high as 12 percent by the end of 2023. This forecast is based on both monetary and supply-side phenomena, particularly the impact of potential oil price shocks.

The recent decline in inflation has been driven primarily by a decrease in energy prices, especially gas and oil. However, Wilkerson contends that we are likely to witness a reversal of this trend, with energy prices expected to surge back to their early-year levels.

Oil in the Inflationary Scenario

The role of oil prices in this situation is two-fold. On the one hand, Saudi Arabia, one of the world's largest oil producers, plans to cut its oil production by 1 million barrels per day. Other members of the Organization of Petroleum Exporting Countries (OPEC), who collectively account for 40 percent of global crude oil production, also plan to reduce their output into 2024.

On the other hand, the BRICS alliance (Brazil, Russia, India, China, and South Africa) wields a growing influence in the global economic landscape. Wilkerson suggests that the increasing assertiveness of these nations could create additional pressure on oil prices. In his words, the "BRICS-plus is not in a mood to be friendly," implying that they may make decisions in the coming quarters that favour their interests without considering their effects on Western markets.

Following Russia's conflict with Ukraine, BRICS nations have also pursued more bilateral trade agreements, thereby beginning to diminish the dominance of the US dollar in international trade. For instance, Pakistan, a nation that has shown interest in joining the BRICS, recently bought discounted oil from Russia, paying for it in Chinese yuan. This shift could further exacerbate the potential for an increase in oil prices.

Inflation and Gold – The Golden Opportunity

With the threat of increased inflation, a possible recession, and potential bank failures looming large in the collective consciousness, gold emerges as a true safe haven option in the volatile economic environment.

Wilkerson asserts that the "stars are aligning for gold." He believes that if the energy and inflation movements he anticipates do occur beginning in the fall, there is a scenario where the price of gold could surpass $2,000 by the year's end.

Gold has historically been viewed as a hedge against inflation. When inflation rises, the value of most currencies fall, and the cost of goods and services increases. As a result, individuals often turn to gold to preserve their wealth as it is a tangible asset that doesn't depreciate in value.

In an environment of high inflation, which may be the case if we are to trust Wilkerson's assertions, gold becomes particularly appealing. In addition to preserving wealth, it also has the potential for price appreciation. If inflation is indeed rising at a rate greater than the CPI suggests, gold may experience a surge in demand, subsequently leading to an increase in its price.

Wilkerson's prediction of gold surpassing $2,000 by the end of the year is rooted in this logic. Given the potential inflationary pressures from healthcare, education, food, and energy, gold's attractiveness as a store of wealth is only likely to increase.

While the official CPI data may suggest otherwise, there are strong indications from multiple sources, including experienced financial experts, that inflation rates might be significantly higher. If this is true, it will have profound impacts on the economy and, by extension, commodities like gold.

If oil prices rise due to production cuts and geopolitical shifts already underway, the inflationary environment could further intensify, increasing gold’s appeal. 

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