The Continued Decline in the US Dollar

Inflation keeps eroding away at the US Economy

Today, as we dive into the latest Consumer Price Index (CPI) inflation data, we're faced with a sobering reality that demands our immediate attention and unified action. Beyond the surface of the reported 3.2% Year-over-Year increase lies a deepening financial crisis, silently eroding the purchasing power of every hard-earned dollar in our wallets. And let us not overlook the broader context: Since January 2021, when the current administration assumed office, total inflation has skyrocketed to an alarming 19%. Let that sink in for a moment….

In just three short years, the cost of living has ballooned by nearly a fifth, with projections indicating that at the current rate, our dollars will lose half of their purchasing power by the year 2033, as the Rule of 72 formula states.

Let us dissect these figures not only as economists but also as concerned Americans witnessing the erosion of economic stability right before our eyes. Consider the index for life's essentials - food away from home, limited service meals, and full-service meals. Each has witnessed alarming spikes: 4.5%, 5.2%, and 3.8%, respectively, over the past year. For families with children, the impact is even more staggering, with food prices for kids soaring as high as 8.8%. These aren't mere numbers; they signify the mounting burden on the budgets of ordinary Americans, who must now stretch their dollars further to provide basic sustenance for their families.

Yet, the repercussions extend far beyond the dinner table. The index for all items excluding food and energy has surged by 3.8% over the past 12 months, with shelter costs leading the charge, skyrocketing by a staggering 5.7%. This means that the very roofs over our heads are slipping beyond the reach of many, while the real estate market grapples with an unprecedented surge in supply. Total homes for sale have surged by a massive 15% Year-over-Year, with single-family homes leading the charge at an eye-watering 21% increase. By July this year, if the current trend continues, we could see an additional 40% increase in supply, even as higher interest rates crush mortgage demand by a further -8% Year-over-Year. The compounding effect of inflation on shelter costs over the past three years is transforming many homes from assets to liabilities, signaling the beginnings of a potential fire sale in 2024. To throw gasoline on the fire, real wages were down for the month and was tied for the largest month over month declines over the past 12 months. 

The unemployment job data is quickly rising, and rising fast in some of the largest states that contribute to total GDP, like in California, New York, and Texas.

Amidst the continuous waves of inflation, another storm brews on the economic horizon: higher interest rates. Following the release of inflation data, the United States found itself at a pivotal moment during the 10-year bond auction, an event of paramount significance for many reasons. Among these is the impact of inflation expectations on investor sentiment going forward. Faced with continued elevated inflation, investors clamor for greater returns on their investments, demanding higher rates of return to offset the eroding value of the US dollar over time. The repercussions of this was felt at today's bond auction, earning it a dismal C-minus rating as rates went higher to 4.16%, reflecting the growing unease within financial markets.

Yet, the ramifications extend far beyond the bond market's wild ride. The surge in interest rates casts a looming shadow over the financial landscape, impacting both the fiscal health of the government and the aspirations of everyday Americans. As interest rates soar, the burden on the government's debt servicing swells to unprecedented heights, surpassing a staggering $1 trillion against the backdrop of a $34.5 trillion national debt.

Meanwhile, for the average American, the reverberations are felt in the realm of homeownership, as higher 30-year mortgage rates around 7% today pile on the pressure, exacerbating the downward spiral gripping America's real estate market.

But the waves of inflation and rising interest rates don't merely apply to the government and homeowners; they are felt through the very heart of the banking sector. With savings accounts yielding 0%, savers are left with little choice but to seek refuge in alternative investment avenues such as Certificates of Deposit (CDs), Money Market funds, or the broader financial markets encompassing stocks, bonds, and precious metals like gold. This mass exodus of funds from traditional savings accounts exerts downward pressure on banks, triggering an incipient run on financial institutions as depositors seek avenues offering higher returns on their cash. The resultant withdrawal of funds imperils the solvency of banks, with the cascading effect evident in the downward trajectory of bank stocks relative to the broader market, signaling investors' slow but steady move to the exits, before they get over crowded.

Yet, amidst these alarming trends, a concerning apathy persists regarding the compounding effects of inflation. Too many Americans remain blissfully unaware that the dollars they clutch today will inevitably dwindle in value tomorrow. Consequently, we're witnessing a disquieting trend: a record number of 401(k) account holders resorting to early withdrawals from their retirement savings to navigate today's inflation financial crisis. According to internal data from Vanguard Group, 3.6% of plan participants withdrew funds prematurely last year, marking a significant uptick from prior years. This is not a mere statistical anomaly; it's symptomatic of a deeper malaise festering beneath the surface—an existential crisis of economic uncertainty and financial vulnerability.

We stand at a pivotal juncture. The road ahead is fraught with challenges, but it is not insurmountable. We must confront the harsh realities of compounding inflation head-on, equipping ourselves with knowledge and fortitude in the face of adversity.

Let us heed the foreboding signs embedded within these figures, uniting in our call for judicious economic policies and prudent financial stewardship. The era of complacency has passed; the time for resolute action is upon us.