Chapter 1: The Current Inflation Landscape

On April 12, the US released its consumer inflation data for March 2022, revealing a staggering year-over-year increase of 8.5%. Average prices surged by 1.2% compared to the previous month, following a 0.8% rise in February. This indicates not only a high inflation rate but also an acceleration in price increases in March.

White House Press Secretary Jen Psaki made a preemptive statement regarding the report, attributing the high numbers to external factors, particularly the impact of the ongoing conflict initiated by Russian President Vladimir Putin in Ukraine. "We anticipate that March's CPI headline inflation will be significantly elevated due to Putin's price hike," she shared with the media.

Let's be candid about the situation. This government official seems eager to deflect responsibility for an economic crisis that appears to be spiraling out of control. While it's undeniable that the war in Ukraine, which started on February 24, 2022, has exacerbated the crisis, inflation was already on the rise prior to this event.

Section 1.1: Understanding the Inflation Figures

The inflation figures are year-over-year comparisons, specifically contrasting March 2022 with March 2021. Core inflation, which excludes food and energy prices, has also seen significant increases. Here’s a summary of the major changes since February 2022:

• Energy inflation: 32% (up from 25.6%)
• Food inflation: 8.8% (up from 7.9%)
• Core inflation: 6.5% (up from 6.4%)

#### Subsection 1.1.1: Analyzing the Money Supply

The M2 money supply, which encompasses cash, checking deposits, savings deposits, and other liquid assets, plays a crucial role in inflation. Essentially, inflation arises when there is an imbalance between the quantity of money in circulation and the availability of goods and services.

When a large amount of money is in circulation relative to available goods/services, prices tend to rise as sellers perceive their products as more valuable. Conversely, when money supply is scarce, consumers perceive their cash as more valuable, leading to decreased spending and lower prices—a scenario known as recession.

The Federal Reserve aims to balance these elements, maintaining a target inflation rate of around 2%. When inflation and growth are sluggish, they typically loosen monetary policy by reducing interest rates. However, if inflation surges, they may increase rates to curb spending.

Recent data indicates that nearly 30% of the M2 money supply was generated in the last two years, largely attributed to government spending. It’s plausible to argue that the Fed's policies have significantly contributed to the current inflationary environment.

Section 1.2: The Role of Supply and Demand

Extreme supply shortages combined with surging demand can also dramatically inflate prices. The energy sector, particularly oil and gas, has a profound influence on overall inflation due to its interconnectedness with various economic sectors.

Before the conflict in Ukraine, the Biden administration implemented measures that restricted domestic oil and gas production, such as canceling the Keystone Pipeline and halting new drilling leases. Although intended to mitigate environmental damage, these actions compromised the U.S.'s energy independence, compelling the nation to increase energy imports.

This suggests that prior government decisions may have intensified the economic fallout from the Russia-Ukraine conflict.

Chapter 2: Possible Future Scenarios

As we look ahead, four potential outcomes emerge:

1. Optimistic Scenario: The Federal Reserve successfully curtails inflation without exacerbating the situation through excessive borrowing. Inflation decreases, the economy stabilizes, and markets continue on a positive trajectory.
2. Economic Collapse: The inflation bubble could burst soon, leading to a rapid economic downturn driven by the Fed's tightening measures. Prices may plummet, resulting in rising unemployment and a sharp decline in stock and real estate markets.
3. Persisting Inflation: Should the Fed's efforts falter, inflation might escalate into double digits, with government officials perpetually assigning blame. Despite economic disconnection, asset markets may continue to thrive, exacerbating wealth disparity.
4. Stagflation Scenario: Continuous interest rate hikes without a corresponding reduction in inflation could lead to a stagnation period reminiscent of the late 1970s. In this situation, commodities might outperform riskier assets.

This analysis is intended solely for informational purposes and should not be construed as financial advice. Past performance does not guarantee future results, and individuals should only invest what they can afford to lose.

The first video discusses the inflation crisis, highlighting the troubling 40-year high rates and their implications for the economy.

The second video focuses on expected stock market returns amid looming recession concerns in 2022, providing insights into potential investment strategies.