Will Inflation Crush the Dollar in 2022?

An “inflation storm” is coming, according to Value Walk.

A few more histrionic news outlets and pundits suggest we’re headed for out-of-control “hyperinflation,” when it will take wheelbarrows full of dollars to buy a single loaf of bread.

Last week, I showed you that much of the fear about inflation is overblown.

Even though inflation is higher than it would have been if the pandemic hadn’t happened, we still haven’t caught up to what inflation theoretically “should” be.

According to theory, a cup of coffee that cost $2.00 in 2011 should cost $2.39 now.

But based on the inflation we’ve actually seen, including the “inflation storm” we’re in? It costs $2.40.

But the government’s “money printing” hasn’t stopped. And it looks like congress is about to pump $4.5 trillion more into the economy with a series of infrastructure bills.

The appliance maker Whirlpool just hiked prices by as much as 12%. Unilever said it was raising the cost of everything from toilet paper to salad dressing.

Naturally, people are worried.

As of early July, 26% of Americans cited inflation as their biggest concern about the economy.

Yet Fed Chairman Jerome Powell and President Biden have been brushing concerns aside.

All this mixed messaging is confusing. So let’s answer the question:

What level of inflation should we reasonably expect in the future, based on everything we’re seeing?

If a cup of coffee costs $2.40 now, in August 2021, we want to predict what it will cost in August 2022, based simply on what we can see in the news and published government policies.

Now, economics isn’t an exact science. I’ll be making a lot of questionable assumptions.

That said, let’s have some fun... With charts and data!

First off, let’s look at the connection between money supply and inflation:

The orange line above is the CPI, which measures the average price of things in the U.S., like rent, utility bills, cigarettes, bacon, cars, etc.

(You can see a list of all the CPI items and how this figure is determined here.)

The blue line is the M2 money supply, which tabulates everything from the dollars in your wallet to the coins you have hidden in a jar, from your bank savings accounts to your mutual funds.

The correlation between M2 and CPI is 0.916. That means they’re nearly in lockstep with each other.

Meaning, when money gets printed, prices will go up.

We can plot that relationship this way to make some predictions:

Here’s what this chart is telling us…

If we add another $1 trillion to the U.S. money supply by this time next year…

We can reasonably expect to see CPI inflation go up about 9.2%.

That $2.40 cup of coffee will cost $2.62.

Let’s say we add $4.5 trillion to the U.S. money supply by this time next year…

We should expect to see CPI inflation go up about 12.8%.

(Interestingly, this is about the amount that Whirlpool raised its prices. Coincidence? I think not.)

In this scenario, that $2.40 cup of coffee will cost $2.70.

This is high inflation, sure. And multiplied across virtually everything you can buy, it does legitimately damage your wealth.

Your dollars will be worth less in the future. 

Is it catastrophic hyperinflation?

Hah. No.

I’ll bet $5 we’re about to see the worst inflation since 1979/1980…

But I doubt we’re going to come anywhere close to the highest CPI increase in American history.

Something catastrophic and stupid would need to happen in the coming months. I’ll let you know if I see it.

“SO, AGAIN, HOW DO I INVEST TO PROFIT FROM RISING INFLATION?”

Last week I recommended Treasury Inflation-Protected Securities (TIPS), or the iShares TIPS Bond ETF (NYSE: TIP). That will go up with inflation. You can also bet against the U.S. dollar, but that’s risky and I do not recommend this.

No matter what, you want to make sure that whatever money you’re making right now goes up by more than 10% over the next year.

This will guarantee that your wealth continues to grow. So ask for a raise, increase your prices, or make better investing decisions (more on that in a future issue).

Whether you’re a salaried employee, a freelancer, or an investor — if the money you make doesn’t grow faster than inflation? You will be poorer. End of story.