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These Two Words Will Soon Invade Your Life

My pest control provider was the first to strike.

When oil spiked to $140 in the summer of 2008, a number of services I use couldn’t absorb the skyrocketing cost of fuel. To offset higher gas prices, they added a “fuel surcharge.” My pest control company tacked on 6% to my bill.

While I certainly didn’t want to pay more, the increased fee didn’t exactly come from out of the blue—I, too, was paying a lot more to fill up the car.

Well, the surcharge trend is back…

  • Many San Francisco businesses recently added an “employee healthcare surcharge” to customer bills, since they’ve found it difficult to keep up with the city’s 2008 law that requires them to provide health benefits.

  • Last month, a Minnesota restaurant added a “minimum wage fee” to every bill to offset the state’s decision to increase the minimum wage.

  • Some hotels recently added surcharges to guarantee two queen beds or one king bed, or checking in early and checking out late.

  • Select car rental companies charge extra for electronic toll collection devices and navigation systems.

  • Most airlines have a surcharge for checked baggage, and some recently added fees to pick seats in advance, skip lines at security, and/or board early.

I think this is exactly how inflation will be handled…

“Inflation Surcharge”

Think about it: as a business, what better way to offset a rapid or sudden increase in costs than to simply add a surcharge? It allows you to claim, right there in black and white on the bill, that you didn’t raise your price, but simply passed along an unexpected cost. It comes with the added benefit that the amount can be adjusted as necessary. And just like me with the fuel surcharge from my pest company, you’ll understand, because you’ll be experiencing it firsthand, too.

Heck, once inflation sets in, “prices” may never rise again—it’ll be the inflation surcharge that goes up (and up and up).

Since inflation could be high at some point, virtually every company you do business with will be forced to pass on those costs—from grocery stores and restaurants to clothing and electronic outlets. Perhaps other than a fixed-rate mortgage or car payment, virtually every bill you pay will be forced higher when inflation begins to rise in earnest.

And here’s the real zinger: that fuel surcharge from my pest guy? It’s still there, six years later.

I think it’s very reasonable to expect to see the words “inflation surcharge” on your household bills in the near future. And once they’re added, they may stick around for a long, long time.

Inflation Is Not a Distant Possibility, but a Near-Term Reality

The Consumer Price Index has risen for four straight months now. Is this the beginning of higher inflation? Here are three reasons why that might be the case…

#1: While the Consumer Price Index (CPI) is officially low, it doesn’t reflect what most of us experience. Here’s the current CPI compared to items like gasoline, groceries, tuition, and electricity.

Over the past five years, the cost to fill your car and put food on the table has increased two to three times more than the official inflation rate. As many items continue to surge more than the CPI, the index will be forced up.

#2: Investments in TIPS (Treasury Inflation-Protected Securities) are on the rise. Due to noticeable increases in rent and housing, some fund managers think inflation may be underway and have taken out insurance…

  • Over $1.5 billion has been invested in TIPS-focused funds so far in the third quarter, the first quarter of inflows in two years and the largest since Q1-2012

  • TIPS have significantly outperformed regular Treasuries this year

#3: According to a Reuters poll of economists, inflation will likely creep higher for the rest of 2014 and into 2015. They forecast the CPI will hit 2.2% by year-end. These guys don’t always get it right, but the data they look at tell them inflation is on the rise.

But near-term inflation isn’t the biggest problem…

“We Weren’t Prepared for the Sudden Spike”

History tells us that once higher inflation sets in, it can quickly spiral out of control. Given our crumbling fiscal state, we must consider the possibility that price inflation could kick in abruptly and rise rapidly. Firsthand reports of those who’ve experienced it make for sober reading.

Amity Shlaes, a senior fellow of economic history at the Council on Foreign Relations and a best-selling author, provides some examples from the past century of US inflation that was at first subdued but then abruptly rocketed to alarming levels. Look how quickly inflation rose in just two years from “benign” levels.

According to Shlaes, US inflation was 1% in 1915 (based on an earlier version of the CPI-U). Within just two years, it soared to 17%. As she states, it happened because the Treasury “spent like crazy on the war, creating money to pay for it …”

In 1945, the official inflation rate was 2%; it accelerated to 14% within 24 months. Inflation registered 3.2% in 1972 and hit 11% by 1974.

It’s clear the arrival of inflation can be sudden, and that prices can quickly spiral out of control. Given the profligate amount of money that’s been printed by many countries around the globe, we could easily become victim to rapidly falling purchasing power.

This is a clear warning from history: expecting the CPI to remain low indefinitely is a dangerous assumption.

Gee, I wonder how we’ll offset those rising costs…

Are You Sure You Own Enough Gold and Silver?

Once inflation grabs hold, don’t expect it to subside anytime soon. Weimar Germany had high inflation for two years—and then hyperinflation kicked in and lasted another two. Four years of debilitating price inflation. There are numerous examples like this from history.

Keep in mind that gold tends to move in anticipation of inflation. That means the best prices on precious metals are now, before the CPI moves decisively higher. By the time inflation makes front page headlines, the big moves in gold and silver will have already occurred.

Contrast the numerous and unprecedented central bank monetary interventions with a gold price below $1,300 and silver under $20… these are gift prices, and will not be available indefinitely.

How, exactly, will you offset the “inflation surcharge” trend? I encourage you to add precious metals to your Hard Assets Alliance account before it invades your life.

 

Jeff Clark is editor of BIG GOLD, and a regular contributor to the Hard Assets Alliance.

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