Economic expert Kevin DeMeritt weighs in on how the federal government has made a number of moves in the past to rein in increased inflation — some of which echo present-day efforts.

Although job losses, coupled with reduced production and spending, wreaked havoc during the COVID-19 pandemic, just a few months after entering into a brief recession in March and April 2020, the economy had reversed course — and continued to climb, buoyed by federal relief programs, rising employment, and real gross domestic product gains. 

Inflation, however, has been increasing, too, since spring 2021. 

“It’s been a long time since we’ve had this kind of inflation,” says Kevin DeMeritt, founder and chairman of Los Angeles-based gold and precious metals firm Lear Capital. “We’re starting to see more and more people become concerned about the volatility in the stock market — which happens when you have high inflation.”

In March 2021, the consumer price index for all urban consumers, considered to be a key inflation gauge, rose 0.6% — its largest one-month increase since 2012. By June 2022, year over year, inflation had reached its highest point since 1981, 9.1%. 

Despite cooling slightly, inflation remains at an elevated level; as of August 2022, the most recent month for which data is available, the index was at 8.2%. 

In recent months, the greater cost of goods and services has had an influence on numerous economic aspects, including investment activity in the U.S., according to DeMeritt. 

A History of Price Pressure 

Inflation has risen periodically over the years in response to numerous events — including a bump between 1969 and 1971 resulting from a booming economy that raised prices for goods and services. Inflation was eventually lowered through a federally enacted wage and price freeze. 

It rose again, however, between April 1973 and October 1982 — the country’s longest period of heightened inflation, according to the White House — when oil prices skyrocketed due to both an OPEC oil embargo and lessened oil production because of conflicts in the Middle East.  

To bring inflation, which had reached more than 14% by 1980, down to a more manageable level, then-Federal Reserve Chair Paul Volcker focused on controlling monetary reserve and growth activity and raising interest rates, which worked — year-over-year inflation had dropped to roughly 5% by the fall of 1982 — but, in the process, the economy was pulled into a 16-month recession, and unemployment increased. 

Oil issues [EB1] were also at the root of the inflationary period that lasted from April 1989 to May 1991, as instability during the Gulf War pushed crude oil prices up; dramatically higher gas prices served as a catalyst for the 2008 inflation spike when the consumer price index shot above 5% for two months. 

Energy costs, though, don’t appear to be a driving force behind the current inflationary climate. Instead, post-pandemic pent-up demand seems to be fueling an ongoing interest in goods, which has occurred in tandem with labor and other shortages.  

“What’s different this time around, as opposed to in the 1970s, is that after COVID, we have a supply chain problem,” Kevin DeMeritt says. “You don’t actually have as many goods as we had three or four years ago.” 

In recent months, the Fed, not unlike Volcker, has been attempting to lower inflation through aggressive rate hikes.  

In March 2022, the Federal Open Market Committee raised the target range for the federal funds rate to 0.25% to 0.50%; it again increased the rate range at its next meeting in May, moving it to 0.75% to 1%. 

In June, the FOMC raised the target range for the federal funds rate to 1.5 to 1.75% — the largest increase since 1994 — and in September, raised it again to 3% to 3.25%. The Fed has also repeatedly stated it anticipates ongoing increases may be appropriate.  

“Most of the time, when they’re raising interest rates, we’re close to bubbles in one or two assets at a time,” Lear Capital’s Kevin DeMeritt says. “In the year 2000 [for instance], they raised interest rates; the bubble was internet stocks. They’re protecting themselves against hyperinflation.” 

The Fed, which purchased U.S. Treasury and agency mortgage-backed securities during the pandemic to help support the economy, also announced in May it planned to begin reducing its holdings, starting in June, by up to $47.5 billion a month through August, and by up to $95 billion in September. 

Lear Capital Founder Kevin DeMeritt: ‘Too Much Money Chasing Too Few Goods’ 

Over the years, in addition to energy costs, supply constraints, and other factors, another element — currency — has also influenced inflation, DeMeritt says.  

During the 1970s the U.S. had been operating on a partially precious metals-linked system. But it stopped exchanging dollars for gold at a fixed value, and printed money took center stage as the standard.  

At least one study has since linked the growth of monetary aggregates under fiat money systems — involving government-issued currency that’s typically not able to be redeemed in gold or silver — with inflation. 

Since 2008, the U.S. has printed $22 trillion in currency, which likely contributed to the most recent round of inflation, according to Kevin DeMeritt.

“The definition of inflation is too much money chasing too few goods,” he says. “When you print that much money, the one effect you’re going to get is inflation. The other effect is going to be bubbles, because you have so much money that it’s going to go in different asset classes and create some sort of bubble, somewhere.” 

Recently, research has suggested the Fed’s efforts to shrink inflation may be starting to have the intended effect. Commerce Department data from late September revealed the economy had shrunk in the second quarter at an annual rate of 0.6%. Around the same time, mortgage rates reached their highest level since 2007. 

The number of available job openings in August fell from 11.2 million to 10.1 million, according to Bureau of Labor Statistics data; separate information from the agency showed wage gains were also moderate in September, with average hourly earnings for all private nonfarm payroll employees rising 0.3%.

Still, the Fed has insinuated that bringing inflation down to its 2% goal may not be easy, and employment and other areas of the economy could potentially be impacted in the process. In June, the central bank also raised its interest rate projections for 2022 from between 3.25% to 3.5% to 4.4% for the year; and is forecasting rates will be 4.6% in 2023. 

With inflation currently hovering around 1978’s 8% level, Kevin DeMeritt advises against assuming its elevated state — and any related economic challenges — are fully behind us. 

“Everybody was thinking in 1978, when inflation was the same 8% we see today, ‘When is this all going to end?’” he says. “Volcker came in and said, ‘We have got to just push up interest rates as high and as fast as humanly possible,’ and it went all the way up to 14% and 15%, almost double where they were in 1978. So no one should have this thought in their head that we’re pretty close to a top here. We may only be halfway to the top, if inflation plays out like it did in the ’80s — it could be worse, actually, because the supply chain part of the inflation equation is broken.”

​​In response, investors concerned about how continued high inflation will affect what they’re saving may want to consider ways to diversify their portfolio with an asset that can provide stability and potentially meter some of inflation’s effects.

“At today’s rate, around 8%, in seven to eight years, your money would drop almost in half,” Lear Capital Chairman DeMeritt says. “Each year that goes by, if I’m losing 8% of the value of my paper money purchasing power, I need something to offset that, and gold is going to be a great alternative. [It’s] a misconception that if interest rates go up, the gold market is going to fall because it doesn’t generate any interest. Gold [went] from $50 an ounce in 1974 to $850 an ounce at the peak of inflation in 1980. You’re going to continue to see, over the next five or six years, demand will continue to increase for precious metals.”