Transcription
In 1972, the median price of a home was about $22,000. By 1982, that had tripled to $66,000. The price for a barrel of oil in 1972 was $3; by 1982, that had become $30. In fact, if you had $1,000 in 1972, it would have lost approximately 60% of its value within the space of the next 10 years, becoming worth the equivalent of $400 by 1982. This may sound completely absurd, but this is something that actually happened. This phenomenon, known as inflation, completely destroyed the savings of everyday Americans.
In fact, over the last four years, the US dollar has been losing its purchasing power at a record pace. Since June of 2020, the US dollar has lost approximately 20% of its purchasing power. During this period of time, the price of a home has already gone from $320,000 to $420,000, a 30% increase. The price for a loaf of bread went from being $1.40 in June of 2020 to $2 today, a 40% increase. All of this has led to the largest inflation spike in the United States that we have seen since the 1980s.
This is a chart that shows us the rate at which the US dollar is losing its purchasing power, and in 2022, it reached some scary levels. Since then, we've seen the rate of inflation come down quite a bit; today, it stands just above 3%. However, many are getting concerned by the fact that it seems to be staying stuck at these levels, and in the last couple of months, it has even begun to show signs of turning back up. In fact, this 3% level is the exact area where inflation began to pick back up in 1972, leading to that decade of incredibly high inflation levels that we just talked about.
We do see some similarities in the way that inflation has been behaving over the last few years compared to the early innings of the 1970s inflation spiral. If this is really the case, it could be that the worst has yet to come for the US dollar's purchasing power. Before we dive into whether this is actually a risk, make sure not to miss our Black Friday discount that we're doing on our service. The reason we teach people about macroeconomics is for a maximum number of people to protect their wealth and ideally profit from the endless number of opportunities that our modern financial system offers to traders.
Throughout 2024, we've had a crazy ride, allowing our clients to benefit massively from the trade ideas that we've sent out. Part of what allowed us to achieve this kind of performance throughout 2020 and beyond are the massive price appreciations that we've seen on assets like gold, the US stock market, and cryptocurrencies. Gold has risen by over 25% since the beginning of 2024, and so has the S&P 500. These are absolutely record price appreciations, not to mention Bitcoin, which has risen by over 100%. Are these massive asset appreciations not a reflection that the US dollar is losing its purchasing power yet again and that inflation in the United States is picking back up?
For example, this is what gold was doing in 1972; it was appreciating violently just a few months before inflation in the US began to pick up. Unfortunately, it's not as simple as that. Gold, stocks, and Bitcoin are not part of what's called the Consumer Price Index (CPI). This is a basket of consumer items that are measured each month to gauge what inflation looks like in the United States. There's a very good reason for why financial assets are not included in this basket: because they don't really impact the average person's day-to-day budget, or at least they're not nearly as relevant as things like shelter, the price of bread, chicken, eggs, the price of gas at the petrol station, and the price of medical and transportation services.
These are all things that are included in the Consumer Price Index, and this is what it looks like going back to the 1970s. This is the version of the Consumer Price Index that takes into account all of the things that I just mentioned, and this is another version of the Consumer Price Index that strips out food and energy. This is what's also known as the core Consumer Price Index. Now, you're probably thinking, why on Earth would they remove food and energy from inflation data? Food and energy are probably the two most important things required for the survival of any human.
Believe it or not, the version without food and energy is actually the preferred measure of inflation that central banks, like the Federal Reserve, use to gauge inflation. The reason for this is that food and energy prices can be very volatile and influenced by external factors, and don't necessarily always reflect the true underlying inflation in the US. Indeed, when we look at the normal Consumer Price Index against this core Consumer Price Index, we clearly see that the core Consumer Price Index is a lot more steady and stable than the normal one. Unfortunately, core inflation in the United States is the one that looks very sticky today; in other words, it doesn't really want to come back down to more reasonable levels.
You see, the Federal Reserve, the US central bank, typically aims for around a 2% inflation rate, and between 2012 and 2020, they were actually pretty good at keeping inflation at around those levels. But then the pandemic hit, trillions were injected into the financial system, and since then, inflation has never really returned to normal levels. In order to find out where it's going next, we need to decompose this core CPI into its different components. When we do that, we see that the vast majority of this sticky inflation we have today is being driven by shelter, or in other words, housing and apartment rent prices.
Indeed, home prices have been rising in the United States over the last four years, as we mentioned earlier, but you can see that it has slowed down considerably over the last year and a half. The median price of a home in the US has actually been trending slightly lower over the last year. Now, the shelter CPI isn't yet reflecting this fully; the government data on shelter inflation is a little bit lagging compared to what's actually happening in the housing market for several reasons that I won't get into in this video. But the main takeaway is that the housing market in the US has cooled down considerably over the last couple of years, and there aren't, for now, any strong signs that it's going to pick back up anytime soon.
If we overlay a chart of something called existing home sales for the US and we shift it forward by around a year and a half, we see that this line predicts what home prices are going to do over the next 18 months. This data is basically telling us the number of homes being sold in the United States at any given point in time. Typically, when the number of homes being sold ramps up, that leads to an increase in home prices—a pretty straightforward relationship. The same thing happens when the number of homes being sold collapses; that leads to a decline in the price of homes. Today, home sales are at pretty depressed levels. The combination of high mortgage rates and a weakening economy are likely responsible for this, but as you can see, it also probably means that home prices are going to continue staying cool over the next year or so.
So, coming back to our core CPI data, this suggests that this large portion of core inflation in the United States is likely to get smaller over the coming months. Okay, but what about things like medical services, transportation services, and other core services that still make up quite a significant portion of inflation today? Well, the biggest influence on the price of services in the US economy, by far, is wages or salaries. Indeed, the growth of wages in the United States has been considerable since the pandemic. At one point, we reached the highest levels of wage growth in the last 25 years of data, and it is still sitting at higher-than-average levels to this day.
This elevated wage growth is definitely contributing to the sticky inflationary pressures we have today, and again, many are concerned that wage growth is going to pick back up today and lead inflation higher once again. However, for now, the trend in wage growth is to the downside, and if we add the data of job openings in the United States and once again shift this data forward by just under a year, we see that job openings predict what wage growth is going to look like over the next year. Right now, there has been a pretty steady decline in job openings, so this does not suggest that wage growth should be picking back up anytime soon.
This makes sense because if there's an abundance of job openings in the economy, then people can easily find a job, and they can be quite confident in negotiating for a higher wage. So, a high number of job openings in the US directly puts upward pressure on wage growth. If fewer jobs are available, on the other hand, then workers will be less likely to ask for a higher wage because they may be more concerned about keeping the job that they already have.
Now, there's also another element to consider when it comes to wages, and that's where we have to come back to food and energy prices. If the prices of food at the supermarket are rising, people will naturally ask for a higher wage to afford basic life essentials. The same thing goes for oil; if prices at the gas pump are high, it makes it more expensive for people to get to work, and that will push workers to ask for a higher wage. Not only that, but if oil prices are rising, that increases the cost to manufacture and transport most consumer goods.
So, food and energy prices can have absolutely massive impacts on inflation. The price of wheat, corn, rice, natural gas, and oil—all of these are food and energy commodities that can be impacted by things like weather patterns, supply shortages, and of course, geopolitical tensions, with oil probably being the most influential commodity out of all of these. In fact, in the 1970s, two consecutive oil shocks occurred as a result of the Yom Kippur War in 1974 and the Iranian Revolution in 1979. These were instrumental in spurring the high inflation of the 1970s, and again, many people are worried about something similar happening today in the current geopolitical context.
There is some good news, however. The United States has ramped up its oil production significantly over the past 30 years, thanks in large part to fracking. So today, the US is a lot less dependent on Middle Eastern nations for its oil. The US is producing a record 13.1 million barrels of oil per day, which is unrivaled by any other nation. Saudi Arabia, for example, produces 9 million barrels of oil per day.
To summarize, there is still no evidence for us that we should be expecting an acceleration of United States inflation anytime soon, and this is a view that we've held since June of 2022 when inflation peaked. Of course, that still means that the US dollar will continue losing its purchasing power; it's just that it's likely to do so at the usual rate. That's why it's imperative for all individuals to invest in order to protect their wealth. At Bravo's Research, our approach is to speculate on the price of assets based on our knowledge of the market. We provide trades that we believe have good odds of providing returns in a short period of time, and we cut positions that are going against us very quickly. In other words, we're professional risk managers. Make sure to use the Black Friday discount that we're offering to have access to our entire trading strategy.