In recent months, inflation expectations in the United States have risen, driving up gold and silver prices. Yesterday, the US consumer price index (CPI) came in higher than expected, reinforcing concerns about inflation and raising the possibility of stagflation, a situation in which inflation is high while economic growth slows and unemployment rises. This environment is favorable for precious metals.

The report showed that the CPI rose at an annual rate of 3.0% in January, exceeding the expected 2.9%, while the core CPI, which excludes volatile food and energy prices, rose 3.3% annually, higher than the anticipated 3.1%. The Federal Reserve generally targets an inflation rate of 2%, but the annual growth rate of core CPI remains elevated, sitting 62% above its pre-pandemic average. Furthermore, this data was recorded before President Trump's tariffs took effect, suggesting that inflationary pressures could intensify.

Although the CPI is the most widely recognized measure of inflation, the Federal Reserve prefers the personal consumption expenditure (PCE) price index. In December, the PCE rose at an annual rate of 2.6%, reinforcing the message that inflation remains high and has been trending in the wrong direction in recent months.

Several indicators of inflation expectations, such as the 5-year break-even inflation rate, have anticipated this increase. This rate, calculated as the difference between the yield on a 5-year nominal US Treasury bond and a 5-year Treasury Inflation-Protected Security (TIPS), reflects the market's forecast for average annual inflation over the next five years. The increase since the end of January reflects the market's anticipation of the inflationary impact of upcoming tariffs.

Another key indicator is the ProShares Inflation Expectations ETF (RINF), which has risen in recent trading sessions, building on its steady rise since August.

Persistent and rising inflation, coupled with a likely recession, is setting the stage for stagflation, a condition characterized by high inflation, stagnant economic growth, and high unemployment. The US and other countries experienced stagflation in the 1970s, driven by money supply expansion and energy crises. If stagflation returns, the Federal Reserve will find itself in a difficult situation, as its ability to implement monetary stimulus will be limited by high inflation. Current inflationary pressures are largely due to COVID-19 stimulus programs, which are making inflation persistent. The Fed is likely to prioritize economic support over inflation control, which could lead to high inflation rates similar to those of the 1970s.

Recessions almost always follow rate hike cycles, and the latest cycle has been the most aggressive since the early 1980s. In just a year and a half, the Federal Reserve raised the federal funds rate from near zero to 5.33%, surpassing even the rate hikes of the mid-2000s that contributed to the collapse of the housing bubble and the Great Recession. Although some economists and investors are optimistic about a soft landing, history suggests that such outcomes are rare after an adjustment cycle of this magnitude.

Several recession indicators are flashing warning signs, such as the New York Federal Reserve's Recession Probability Model, which assesses the likelihood of a recession in the next 12 months. This model has begun to show a downward trend, indicating that the US economy may already be in recession or on the verge of entering one.

The resurgence of US M2 money supply growth over the past year, following a period of decline, also reinforces the stagflationary outlook. Money supply expansion is the fundamental cause of inflation, and this renewed growth explains why inflation has remained high and why gold and silver have risen over the past year. As Milton Friedman stated, “Inflation is everywhere and always a monetary phenomenon.”

The current inflation trajectory mirrors that of the 1970s, a parallel highlighted by financial publisher Porter Stansberry. While stagflation would be detrimental to the economy, precious metals and mining stocks could benefit significantly, as they did in the 1970s. Gold and silver could follow similar patterns, with gold initially outperforming silver, but silver taking the lead as the bull market matures.

President Trump and the Department of Government Efficiency (DOGE), led by Elon Musk, have made progress in reducing government spending, but these cuts are minimal compared to the country's debt and budget deficit. Deeper cuts could lead to more layoffs and an economic slowdown. DOGE's measures, while fiscally responsible, could accelerate a recession that was already underway before Trump took office. Without addressing the root cause of inflation, stagflation remains the most likely outcome, creating a bullish environment for gold, silver, and mining stocks.

Jesse Colombo, Money Metals