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There are growing doubts about the official CPI numbers in the US. Oil and food prices are going up in the markets, but aren’t seen in CPI. If inflation will indeed rise, how will this affect the dollar? Here are some thoughts of a scary scenario.

The well known investor Jim Rogers says that the government’s inflation data is a sham. Here’s a quote from the Telegraph:

“Everybody in this room knows prices are going up for everything,” Mr Rogers told the Reuters Summit.

Rogers expects commodity prices to rise, US bonds to plunge and gold to reach $2000. While many doubt these predictions, the price of food in the US is rising slowly.

I had the honor to speak with Gonzalo Lira who sees hyperinflation coming to America, starting in the spring. While Americans will accept higher prices during the cold winter, prices won’t come down so easily in the spring, and that’s when the cycle will begin according to Lira.

And how will this affect the dollar?

The initial reaction to higher inflation signs will be positive for the dollar. Why?

  • Interest rates: Higher inflation means raising interest rates, as Rogers predicts.
  • Economic recovery: It will also be seen as a sign that the US economy is recovering, getting out of deflation and enjoying a stronger, more stimulated economy.
  • Higher yields: Higher commodity prices will diversify money away from bonds. Lower bonds mean higher yields, and this will also strengthen the US dollar. In recent days, higher US yields have pushed the dollar higher, especially against the Japanese yen, but also against other currencies.

But what will happen in the long run? Inflation or hyperinflation is a very messy thing that will eventually devalue the currency. So, if this scenario indeed happens, and people realize that it is out of control, the dollar will devalue.

What do you think?