HOLTHE: Inflation — friend or foe?

Sponsored content: Kris Holthe is a precious metals broker with Calgary-based New World Precious Metals

Inflation is the gradual loss of purchasing power that is reflected in a broad rise in prices for goods and services over time. It is predominately created by an increase to the money supply. More dollars buying a static amount of goods and services lead to an increase in price. Inflation can be understood as the gradual loss of purchasing power caused by the declining value of fiat currency.

Inflation in Canada is measured using the Consumer Price Index (CPI). It measures changes in prices for the average household. Statistics Canada conducts an annual survey to measure the cost of household spending. They interview 48,500 Canadian households inquiring about their purchasing habits such as buying trends and pricing. Statistics Canada then extrapolates the data to represent the entire population. Core CPI excludes food and energy and because of this many analysts believe the true inflation rates are higher than the government posted index. The CPI in Canada was 2.4% in 2024, 3.9% in 2023, 6.8% in 2022 and 3.4% in 2021.

Inflation compounds year over year. For example, an item that is worth $100 in 2020 would cost $117.49 in 2024 using the Canadian CPI numbers. The CPI ultimately measures the increase in costs year over year. What is commonly called inflation is really loss of purchasing power which isn’t something people give a lot of consideration to but it can be profound. If you had an annual inflation rate of 5% for 5 years the purchasing power of $1,000,000 would be reduced to $725,000.

A startling example is the loss of purchasing power of the U.S. dollar verses gold. In 1933, gold in the U.S. was priced at $20.67 a troy ounce. April 5, 1933 U.S. President Roosevelt issued Executive Order 6102 “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States” thus making it illegal for U.S. citizens to own more than five ounces of gold. In 1934, the statutory gold content of the US Dollar was changed from $20.67 to $35 an ounce. This devalued the dollar in relation to gold by 70% overnight. President Gerald Ford signed a bill legalizing ownership of gold December 31, 1974. Gold has since appreciated in value and recently hit an all time high over $2,900 USD per troy ounce. Thus, since 1933 when gold was $20.67, the U.S. dollar has lost 99% of its purchasing power in relation to gold.

Gold is considered a benchmark for measuring inflation. It is priced in USD and traded internationally using the global reserve currency, the U.S. dollar. Since the U.S. dollar was taken off the gold standard in 1971 the price of gold has increased in value an average of 8% a year. That’s not to say gold increases in value every year but the average over the long term is 8%. Gold has a history of holding its value and is understood to be an excellent inflation hedge.

In the past 50 years the governments of the world have been accumulating debt at an unsustainable pace. In 1971 Canada had approximately $20 billion in federal debt. Today the Canadian federal debt sits at $1.4 trillion. Debt has seen a parabolic rise since the great financial crises starting in 2007. Quantitative easing, or money printing, was implemented to ease financial conditions by providing liquidity. In 2007 Canada's debt was $458 billion. It has tripled in less than 20 years.

Inflation can be beneficial to asset owners so long as the assets are appreciating at a greater rate than the loss of their purchasing power. For example, if you own a house that appreciates 7% in a year and inflation is 5% that year, then you had a real net increase of 2% on the value of your house.

Any asset held in fiat currency are subject to the loss of purchasing power year over year, compounding. Cash savings, insurance, equity instruments, bonds, securities are all examples. The gains have to outpace the loss of purchasing power to get ahead financially.

Central banks control the money supply and set interest rates while trying to maintain a 2% inflation target. If the banks are able to maintain a true 2% inflation target, your wealth as measured in fiat currency, loses half its value every 36 years. If inflation is 5% per year, your wealth is halved every 14.4 years.

Inflation is often called the ‘silent killer’ because of its subtle yet profound impact on economies and individuals financial well being. It’s so slow most people don’t notice the gradual decline in their purchasing power over time. It is worth considering an inflation hedge and gold has a great track record.

Sponsored content: Kris Holthe is a precious metals broker with Calgary-based New World Precious Metals.