Notoriously the word inflation is known for creating chaotic discourse and crazy predictions of massive economic catastrophes. Inflation is crazy! Some of it is true—prices for a lot of goods are in fact spiking, and this can certainly have negative effects on the overall economy. Also true is the fact the government “created” $11.8 trillion since the pandemic began, and printing that many dollars – as any freshman economics text will tell you – is bound to reduce the value of every single dollar.
Even so, a catastrophic level of inflation has not happened—at least not yet. So, instead of reaching into the depths of dark economic consequences, let us take a clear-eyed look at the facts about inflation, where the disconnects lie, and what we can realistically expect going forward.
What does $11.8 trillion look like?
Most people find it challenging to even conceptualize one trillion dollars, let alone 11.8. To break it down—at a rate of $1 per second, it would take 11.57 days to spend $1 million dollars, 31.55 years to spend $1 billion and 31,546 years to spend $1 trillion. This would require you to find $32 million worth of things and services to spend your money on every year. And that is just $1 trillion, now multiply it all by 11.8.
Is there even that much money in America? Yes, as it turns out. If you add up all the bills and change in everyone’s wallets plus their bank deposits, you come to about $20.1 trillion. That’s the so-called M1 money supply. By convention, economists add in money-market funds and other near-cash equivalents. By that measure, what is known as M2, there is $21.2 trillion floating around. The Federal Reserve has, apart from that, a net $4.1 trillion on its balance sheet.
It’s sobering to consider that almost half of all the dollars in the world were created by the literal or figurative printing press within the 
past two years.
While some note that since the start of the pandemic inflation has tripled, let’s remember we are scaling off a very low benchmark. If a flood of money is really eroding the dollar’s value, why is inflation only 7%, not 50%?
Part of the composition of that $11.8 trillion is the $5.2 trillion price tag directly attributed to COVID-19 and the economic response. This sounds like a lot until compared to the $4.7 trillion spent on our last national emergency, World War II—plus another $114 billion for the postwar Marshall Plan—adjusted for inflation.
Fast money? Not really.
Another chunk of 2020-21’s new money stems from the Fed’s policy of quantitative easing – that is, buying debt in order to keep interest rates low so that American businesses can lead us out of this hole. Also, there is the $1.2 trillion already budgeted—but still almost entirely unspent—on hard infrastructure projects. All these measures received significant bipartisan support.
Not counted, however, is the Build Back Better plan, which is neither bipartisan nor enacted law. At an estimated $1.9 trillion, it would not be the biggest component of the two-year splurge and is unlikely to get to the Senate floor before 2022 – if at all. Even so, the facts about inflation reveal that even if we go into an inflationary spiral, increased spending on soft infrastructure will not help, but is not likely to be the factor that pushed us over the edge.
The answer is what economists call the velocity of money. This is the frequency with which one dollar is used to purchase goods and services in one year. If the velocity of M2 is increasing, then more transactions are occurring between individuals in an economy. If it is decreasing, Americans are consuming less. Increasing velocity is seen as inflationary, according to the Corporate Finance Institute, and presumably decreasing velocity would be disinflationary.
Still, if the popular wisdom is that hyperinflation is coming because of all the money being created, what has been saving us so far? And how long can it continue saving us?
Velocity trended down throughout the entire economic expansion of the 2010s—since 1997, to be exact—and has been a big factor in why the budget busting of the past three presidential administrations did not lead to the inflationary effect so many predicted. Then, during the pandemic, velocity really fell off a cliff. People stopped spending, and prices do not rise with such little demand.
The facts about inflation, then, show us that velocity is what we need to pay closer attention to—in conjunction with money supply. Unless M2 velocity rises sharply with a drastic increase in consumer spending, we probably will not have to worry about a 1970s-style inflation.
Inflation Today
We do need to be concerned about 2020s-style inflation, however. Consumer price increases can also be caused by tight supplies and overwhelming demand. Currently, the usual culprits for cost-push inflation—a devaluation of the currency and increased taxes—are not in evidence, but the wholly unprecedented glitching of the global supply chain is having the same effect. This is also where expectations of 
future inflation could become self-fulfilling prophecies as firms raise their own prices in anticipation of their suppliers raising theirs.
Currently, households surveyed by the Federal Reserve Bank of New York expect prices to rise at a 5.7% rate over the coming year and a 4.2% annualized rate over three years. While that is twice as high as the Fed would like to see, it is nowhere near the 14.6% experienced in May 1980, the highest in the U.S. since 1948, when tracking started. Interestingly, people expect inflation to be spiky in the short term but return to equilibrium over time. This reflects the widespread view that the supply-chain issues are substantial but will be of limited duration.
This also dovetails with the nature of the goods and services that are most impacted by the current bout of inflation.
While food prices might have surged at the beginning of the pandemic, they quickly fell back in line.
Meanwhile, energy seems to continue spurring on whatever inflationary cycle is out there, but even that might have run its course. According to the AAA, gas prices—which had been rising all year—dipped 4 cents per gallon in the first week of December to $3.35 on average.
Still, cost-push inflation isn’t the only threat out there. Demand-pull inflation could also play a part in any erosion of buying power. The big drivers here are interest rates (already low), monetary supply (which we just discussed) and higher wages. The last one is worth further analysis because much is being said about labor shortages causing entry-level wages to soar. While those anecdotes are undoubtedly true, they do not seem to have much of a long-term effect on the broader pay scale.
The Smart Money
As much as many people like to complain about the relatively tame inflation we are currently encountering, and as much as others enjoy making doom-and-gloom predictions about hyperinflation, those who make a living projecting price movements are having none of it.
While market experts can be wrong – sometimes spectacularly so – they are paid big bucks to be right when it comes to the facts about U.S. money far more often, and they have access to better data and better models than we do.Pay attention, then, to what the all-star pros are doing rather than what the junior-varsity pundits are saying.
Starting with the price of gold, an inflation hedge, in fact, there are not a whole lot of other reasons to buy it.
As the world’s economic output stopped the first trading day after the shutdown, leaving no room for inflation, the value of gold took a nosedive.
Over five months, it skyrocketed 40%, but since that August 2020 peak dipped more than 12%. Even so, gold is still expensive by historical standards, thus there is some concern about inflation, even if not as pronounced as at the peak of the pandemic. Incidentally, gold prices had been rising steadily since 2018, two years before Washington’s spending spree.
Next, look at foreign exchange. If the U.S. is experiencing inflation out of line with the rest of the world, then it would be losing value against other reserve currencies. Still, the euro, pound and yen have only moved a couple pennies off their dollar values from early March 2020.
How about interest rates? These go up when monetary authorities are trying to curb inflation and down when they aim to encourage the private sector to create more jobs. During the Great Recession, the Fed Funds rate – what money-center banks charge each other overnight – was effectively 0%. As inflation began to be perceived as a risk in 2018, Fed Funds stair-stepped up to around 2.5% before reversing course in 2019. The pandemic saw it drop suddenly from 1.5% to near-zero and remains so. If the Fed board – most of whom were appointed by President Trump — thought that inflation was a major threat to the U.S. economy, they would raise interest rates, especially considering that America already has more open jobs than it can fill. You can look at Treasury yields, prime rates, mortgage rates or any other metric and see the same thing: Interest rates are rising, but slowly, and only because there is little room to drop.
It’s Complicated
Are we cherry-picking our data points to support our thesis? Maybe. From our chair, it looks like inflation will be higher in the future but – housing and energy prices aside – we are not seeing an economic Armageddon. Of course, everyone has to live somewhere, so there will be ripples from housing and energy costs. Even so, we do not expect to be paying $15 for a Big Mac anytime soon.
Even if inflation is not a catastrophe, it is still a problem. It can nibble at not only your paycheck but also the returns on your investment portfolio. So this could be a good time to talk to a financial advisor about the facts about inflation and how to protect your nest egg from inflation – whether it turns out to be a little or a lot – for a couple reasons.
First, ‘tis the season for year-end tax planning.
Second, if you wait too long, the price for financial advice might go up.