It’s all the government's fault. By March 16th, you’ve probably heard your uncle mention at least 4 times now that the dollar is going to collapse and that the price of everything will skyrocket. If you were to ask why, the answer would be a resounding and underwhelmingly researched… ”the government” or something to that effect.
The reality of the situation though is that it’s much more complicated than that. Determining and forecasting the relative strength of the US Dollar and the price of the goods it can buy is a macro-economic undertaking. The long list of measurements and variables that come with that type of configuration is just not encompassed by our speculation, and so our guesses are just that.
However, we can make educated predictions and approximations about where we stand. What’s on the minds of most Americans is inflation, in large part due to the previously dispersed and incoming stimulus packages, the most recent totaling north of $1.9 trillion USD. While these fears are understandable, they’re a bit unfounded and fail to consider several things.
Inflation for 2020 is estimated to have ended up at about 2.2%, which is...yeah, about normal. Although there is no formalized standard for a good inflation rate, experts tend to shoot for about 2% on a yearly basis, seeing this as an indicator of a healthy, growing economy.
Our most recent report from the Bureau of Labor Statistics (BLS) showed a 0.4% increase in the consumer price index (CPI) during the month of February, after clocking in a 0.3% uptick in January. This is an aggregate report, and as you'd expect, certain baskets of goods got different results. Fuel was up 9.9% on the month, while new vehicles were down 0.9%.
So, is the dollar on the road to recovery then?
Not yet, per se. The inflation rates don’t tell the whole story and can be a bit short-sighted at times. It’s certainly not the end of the world, but it’s not as bullish as it could be either. The Fed will likely continue their easy money policy into 2022, keeping interest rates low and new inflows of cash streaming steadily.
The USDX, which compares the strength of the USD relative to 6 major foreign exchange currencies, has been down since last spring and continues to hang around $90, meaning we’re below our standardized level of $100 on purchasing power for now.
And many bearish hedge funds are betting against the dollar as it’s reached its lowest point in 27 months or so, and the outlook is grim from the perspective of the pessimistic investor. However, optimists tend to see economic recovery on the horizon and expect that any supposed greenback disaster is at bay for now, and so here we are in this forex purgatory of sorts between bullish and bearish.
What does this mean for you?
We’ve staved off inflation a bit due to the pandemic’s economic slowdown, and it may creep in slowly or lower than expected as time goes on. We shouldn’t expect anything dramatic to happen to our purchasing power any time in the near future, as the fed seems content to keep propping up the economy as long as necessary, but beware of the potential future consequences this could have on your money, and diversify appropriately.
✋ Answer to the trivia question: After WWI when hyperinflation wreaked havoc on the German currency, Germans use paper money for wallpaper. In 1923, the exchange rate between the USD and the German Mark was a trillion Marks to one dollar. A wheelbarrow full of money couldn't buy a single newspaper. The currency had lost meaning, and many people used it as wallpaper instead. Quite a practical solution!