Inflation Continues to Decimate Average Americans
America's failed policies have led to conflict with Russia, attempting to draw attention away from cooking the books with CPI Manipulation..
January's CPI came out last week rising .6% M/M (month over month). Marking a 7.5% Y/Y (year over year) gain! The biggest print in over 40 years!
I thought the changes being made to how CPI is calculated would help measure down the true inflation rate. Not quite yet but these effects can be seen when looking at the data in detail from the BLS (Bureau of Labor Statistics). Large scale moves will probably take some time to show.
Hedonics and substitutions are still the primary tools used to understate the true inflation number.
Hedonics is when the rising price of a car, for example, is canceled out in the calculation because it saw relative "innovations" in proportion to the price increase. If a car was $30,000 in 2020 but rose to $45,000 in 2021, an increase of 50%, could still be reported as not “increasing” in price. If that car was a, substantial, improvement from the previous model therefore making that 50% price increase justified. Meaning that price increase does not make it into the CPI calculations.
Substitutions is when due to the rising price of one good, say steak, increasing by 20%. May be offset by beef for example, which is only up by 2%. Due to steak becoming more expensive less people choose to buy it. Leading beef to become the more heavily weighted meat in that portion of the index.
Every number in the CPI is a weighted number that carries some form of value out of a 100% total. There are three main categories everything is broken down into:
Food - which has two main categories. Food at home and food away from home. Simply what you pay for groceries and how much you pay when you go out to eat.
Energy - which also has two main categories. Energy commodities: fuel oil and motor fuel. Energy services: electricity and utility gas service.
All items less food and energy - This is broken down into two major subcategories which cover a variety of items. Commodities less food and energy: commodities, apparel, new vehicles, used cars/trucks, medical care commodities, alcoholic beverages, tobacco/smoking products. Services less energy services: Shelter, rent or owners equivalent rent. Medical care services and Transportation services.
All of these things are weighted towards future expectations. More “weight” is subscribed to items that are thought to be in favor with consumers. With our economy reopening the weighting should shift from food at home to food away from home.
2020 through 2021 saw a rapid rise in food at home prices. Causing those numbers to become over weighted vs food away from home, due to the fact less people were eating out. Clearly, telling everyone to say home helped contribute to this shift. However, there were still increasing prices at the same time in the food away from home category but remained underweighted due to the fact people weren’t eating out as much.
Now that expectations are normalizing with food at home prices. Supply chain issues potential resolving themselves and customers "accepting" higher grocery bills.. Food at home will likely start to even out or go up less. Food away from home would likely continue to climb due to rising wage pressures that do not tend to go down. Continuing to see higher food prices, if they normalize, coupled with higher wages creates a higher overall number.
They do not want a stickier number to dominate the indexes weighting so the heavier weighting will slowly shift to at home food not away from home. As the number associated with food away from home slowly rises it could remain weighted down to food at home. In order to keep the food portion of the index from rising as a whole.
Even if the price of food at home continues its rapid rise higher the price of food away from home will increase more with wage pressures.
Another good way to view the manipulation in the index is looking at shelter numbers. Shelter costs make up more then 50% of the average persons expenses, probably more like 75%.
Rent inflation as measured by the government is up 3.76% Y/Y and shelter inflation up 4.36% Y/Y. Apartments List says rents have risen 18% in 2021, that’s a huge difference(14%)!
Owners equivalent rent (OER) does not even get close to a representation of how much housing prices have increased. OER is just a survey given out asking home owners, if they were to rent their current homes, how much would they rent it for.
What does an average homeowner know about the rental market?
Probably not much given they are owning a property not renting one. Proving this number is extremely understated. Regardless, if rents make up eight percent of the weighting and are rising at an underrepresented rate. What could that mean for future expectations and weighting of that basket?
We are moving into a more rent focused housing market as more people are being priced out of being able to afford a home. If more people are renting the rent portion of the index would increase in weighting. Making the rent a bigger portion of the shelter component driving the number higher.
PPI also rose 1% M/M, making it a 9.7% Y/Y rise. A huge number considering inflation is only coming in at 7.5%. I've mentioned how PPI is a leading indicator for the direction of CPI. I believe we have a few quarters left of rising CPI prints. After, things should start to level off and slowly trend down. I wouldn't expect the trend down to be steep though. Maybe a return to the 4% to 5% Y/Y range.
As of writing this Russia has invaded Ukraine.
Tensions in Eastern Europe have led government to blame Russia for America's inflation problem. That could not be further from reality..
Off of this news gold along with commodities have risen in price. A reasonable reaction given uncertainty to the global ramifications of invasion. Also do to the fact Russia exports 500,000 barrels of oil per day to the U.S.. Not to mention the large amount of energy and other commodities they export to Europe.
None of what is happening in Europe is the root cause of our inflation problems. These problems were here long before this and can only be expected to get worse if a true conflict with Russia emerges.
Russia's gold holdings of 2,300 tons have gained $10 billion in value overnight. While producing 10 million barrels of oil per day equaling around $3 billon in gains this month. Economic sanctions will not do anything to harm them. Russia knows this and has been preparing for months with that in mind.
I believe inflationary pressures will cause this conflict to be resolved as Russia holds all the cards economically over Europe.
Inflation is at 7.5% and rising. Raising interest rates is the only way to tame inflationary pressures. Currency must be extracted from the system in order to meet the lack of goods/services. This means nominal rates must get above the rate of inflation. Right now rates are at ZERO, this means a minimum of 8% is required.
Last time the Fed tried raising rates by .5% they had to reverse course. We had roughly 22 trillion dollars in debt in 2018 when this happened. Fours years later we have surpassed 30 trillion. If we couldn’t raise rates with 22 trillion in debt how can we do it with 30 trillion. WE CAN'T.
Everything is addicted to cheap, free, "money" (currency). The only way the Fed and government believe it is possible to spur economic growth is with ZERO percent interest rates, in order to spur lending. Regardless of if that lending is going into productive or wasteful means.
Hint hint, mostly wasteful since 2008.
Since QE began in 2008 that lending has mostly gone into financial assets. Further financializing our economy, hollowing out our manufacturing base and displacing our productive capacity. There are tons of structural issues that need to be addressed within our economy. Both on the monetary side as well as the fiscal side. These two go hand and hand together.
I plan on highlighting in my next post about how we can all protect or wealth when the currency is losing value at such an immense rate. Stay tuned for that.
In the mean time the Fed will face the corner they have backed themselves into with next months FOMC meeting. I expect the first rate hike to come in, with the announcement of at least three to four more planned for this year. I doubt we get to see four before something breaks and everything is reversed.
Politics is playing a huge roll as we can all see. Everyone is talking about inflation and trying to get it under control. Even if the rate hikes crash the markets and economy, it should only be temporary. The drug will have to be injected once more but at even greater doses. This time the dose will be fatal.
We know our elites and politicans have no interest in addressing any of the real problems that I've highlighted above. They are all A' okay in this inflationary environment. Unless they push to cut spending, balance the budget, brings jobs back to America, remove regulations and most importantly AUDIT THE FED! They don't have the best interests of Americans in mind.
So what is it gonna be Mr. Powell?
Which syringe are we going for first..?