In 1972, the median home price was $22,000. By 1982, it had 3x to $66,000.
Oil surged from $3 to $30 per barrel.
Most alarmingly, $1,000 in 1972 was worth just $400 by 1982 – a devastating 60% loss in purchasing power in just a decade.
This phenomenon, known as inflation, destroyed American savings.
Since June 2020, the U.S. dollar has lost approximately 20% of its purchasing power.
You can see the effects of this everywhere in daily life.
The median home price has surged from $320,000 to $420,000, marking a 30% increase that puts homeownership further out of reach for many Americans.
Even basic necessities reflect this trend.
A simple loaf of bread has jumped from $1.40 to $2.00, representing a 40% increase.
These dramatic price increases contributed to the largest inflation spike witnessed since the 1980s.
While inflation has retreated to just above 3%, there’s growing concern about its persistence.
Recent months show troubling signs of potential reacceleration, similar to the pattern observed in 1972 before a decade of progessive inflation.
In fact, 3% inflation is the exact level where it started picking up in 1972.
The market’s response to inflation fears has been dramatic.
2024 has witnessed remarkable appreciation across multiple assets, with gold and the S&P 500 both gaining over 25%, while Bitcoin has delivered extraordinary returns exceeding 100%.
At Bravos Research, we’ve helped clients navigate these inflationary times with professional risk management and strategic trades.
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Understanding Inflation
Could the S&P 500, gold and Bitcoin rallies signal another dollar decline and a resurgence of inflation?
Not so fast.
Gold, stocks, and Bitcoin are not part of the Consumer Price Index (CPI)
The Consumer Price Index (CPI) measures inflation through a basket of everyday items essential to American life.
While the standard CPI includes all consumer goods, the Fed prefers to focus on core CPI, which excludes volatile food and energy prices.
This exclusion might seem strange, as food and energy are fundamental to survival.
However, their price volatility can mask underlying inflation trends.
The core measure provides a more stable measure of long-term inflation pressures.
Comparing CPI and core CPI shows core CPI is more stable.
Unfortunately, core inflation remains “sticky” and is stubbornly above the Fed’s 2% target.
Housing Market Dynamics
Breaking down core CPI reveals that housing—classified as “shelter”—is the main driver of persistent inflation today.
While home prices rose sharply post-pandemic, they’ve cooled recently.
The median home price has begun trending lower over the past year, though this cooling hasn’t fully reflected in official inflation statistics due to lagging government data.
Existing home sales data, which typically leads home prices by about 18 months, points to continued cooling ahead.
High mortgage rates and a weaker economy are key contributors to this trend.
This indicates shelter’s impact on core CPI may decline soon.
But what about medical services, transportation, and other core components still contributing to inflation?
The Wage-Price Connection
Service sector inflation largely depends on wage growth, which recently touched 25-year highs.
However, the trend is now shifting downward, influenced by declining job openings across the economy.
The relationship between job openings and wages is straightforward.
Job openings can predict wage trends by about 1 year.
Why?
Well, when positions are abundant, workers can confidently negotiate higher wages.
As opportunities become scarcer, employees prioritize job security over wage demands, naturally reducing wage pressure.
Food and energy prices also influence wages.
Rising grocery or gas prices push workers to demand higher wages.
Oil price spikes, in particular, affect transportation and manufacturing costs, creating a ripple effect.
Energy Independence: A Critical Difference
In the 1970s, oil shocks from geopolitical events like Yom Kippur War and Iranian Revolution drove inflation significantly higher.
Today’s geopolitical tensions raise concerns for such a scenario to repeat.
But unlike the 1970s, today’s United States enjoys significant energy independence.
Current U.S. production of 13.1 million barrels per day dramatically exceeds Saudi Arabia’s 9 million, providing crucial insulation from Middle Eastern supply disruptions.
This energy self-sufficiency represents a fundamental shift from the 1970s vulnerability that contributed to devastating inflation.
While the dollar will likely continue losing purchasing power, we see no evidence supporting a return to 1970s-style inflation acceleration.
Strong domestic energy production, a moderating housing market, and declining wage pressures create a markedly different environment from that turbulent decade.
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