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December Consumer Price Index data came out on Wednesday (Jan. 12). Month-on-month, it was again even hotter than expected. Peter called it an inflationary freight train that the Fed’s “field of dreams” monetary policy will not stop.
“Transitory” inflation has now been running hot for a full year.
The year-on-year CPI was 7%. It was the biggest annual CPI increase since 1982.
Month-on-month, the CPI spiked another 0.5%. This was hotter than the consensus 0.4% projection.
Core CPI (stripping out food and energy — as if you don’t have to eat or put gas in your car) was up 5.5%.
Goods prices were up a staggering 10.7% That was the biggest 1-year increase since 1975.
Keep in mind, this is using the cooked government CPI formula that understates inflation. If the government was still using the formula that it used in 1982, inflation would be higher in 2021 than it was then. In fact, we’d have the highest level of inflation in history. According to ShadowStats, it would be just over 15%.
Based on the methodology the government uses to calculate housing prices (owners’ equivalent rent), housing prices were up 3.8% in 2021. Meanwhile, the actual home prices rose about 16.5%. If you take owners’ equivalent rent out and put home prices in the calculation, 2021 CPI suddenly becomes 10%.
Some people have recently claimed we shouldn’t worry about inflation. They say that wages go up along with prices, so it’s basically a wash. But wages are not going up as fast as prices. Real wages (nominal wage increases minus CPI) were down 2.4% in 2021. That means even with your raise, you have lost purchasing power. And you’ve lost even more than the official numbers reveal. If you use an honest inflation measure, real wages were down somewhere in the neighborhood of 10.4%.
As Peter Schiff said, “Consumers are going to have to live in the real world, not in the government’s fantasy world.”
Over the last year, the dollar has gone up and gold has dropped on hot CPI data. Instead of looking at inflation, they were focused on the possibility of Fed rate hikes. But on Wednesday, the dollar got clobbered and gold held steady with modest gains. Peter said he thinks this shows investors are starting to figure out that it doesn’t matter if the Fed hikes rates.
“Any rate hikes that we get are going to be too little too late to do anything to derail this inflationary freight train.”
There has been a misperception in the markets over the last year. People have focused on nominal interest rates and ignored real interest rates. In fact, real rates are historically negative.
The real interest rate is -7% using the government CPI number. The Federal Reserve is only talking about slowly raising rates to 2% over the next two years. If inflation remains constant, real rates would still be -5% after two years of hiking.
“That is not a positive environment for the US dollar and investors are starting to realize that and they are dumping dollars.”
And while there wasn’t a rush into gold, at least investors didn’t dump it.
Meanwhile, if you thought the Fed was about to embark on a successful war on inflation, Jerome Powell’s Senate testimony should have cleared up any confusion.
Powell admitted that even when the Fed raises rates and ends quantitative easing, monetary policy will still be “accommodative.” Peter questioned that policy.
“If we have an inflation problem; if inflation is at 7%; why are we accommodating with easy money? If the Fed really wants to fight inflation, you can’t fight inflation with an accommodative policy. That’s the type of policy you have when there is no inflation. When you’re trying to simulate a weak economy, that’s when you do loose monetary policy.”
Powell is talking out of both sides of his mouth. He’s saying he’s going to fight inflation and continue stimulating the economy. You can’t do both.
“You can’t put out a fire with gasoline. But that is what Powell is bluffing that he is going to do.”
Powell is still insisting that “supply chain problems” will resolve in 2022 and lower some of the inflationary pressure.
“In other words, even though the Fed, or Powell, has claimed that they were wrong about inflation being transitory, they’re basically still clinging to that lie. Because they’re just saying that the transition is going to take longer than we thought because they think the inflation problem is going to take care of itself.”
Peter called it a “field of dreams” monetary policy.
“The Fed is living in this fantasy land and they just think, ‘If we print it, the supply will come.’ They think we can keep on with our easy-money supply, but just eventually, the goods are going to be there. As long as people want to buy stuff, eventually, the stuff for them to buy is somehow going to magically appear. It doesn’t work that way. Stuff has to be produced before it’s consumed.”
In this podcast, Peter also talks about Elizabeth Warren trying to blame inflation on price gouging, makes the case that Democrats are laying the foundation for price controls, and discusses Paul Tudor Jones’s bitcoin forecast.
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