Inflation is all over but is it becoming too main stream? In some ways I would say when you find yourself on the side of the majority it might be time to start looking at the other perspectives. When it come to the inflation debate I don't quite think it is time to jump on team transitory. More likely almost time for team deflationary bust but that may have some more time before it unfolds. Let's dive into the PPI, Producer Price Index, numbers that were released yesterday and see what team they hint at being on.
The PPI numbers measure the price of goods sold by manufactures, meaning these prices usually lead the CPI numbers. November's number came in hotter then expected 0.8% vs the 0.5% forecast. This moved the year over year number up to a record 9.6%! This is the highest reported number on record.
With this record high it is safe to assume that the probabilities have gone up on seeing much more upside in the CPI. If consumers are only paying an increase of 6.8% for goods but it costs companies 9.6% to produce those goods. Then manufacturers are selling everything at a loss, which everyone knows is bad business. Its really the consumers gouging business instead of the other way around.
Politicans often sell us the false belief that businesses are gouging consumers for excess profits. Clearly if business were charging to much for certain goods then the public would refuse to buy those goods at the higher prices. Therefore the free market allows for consumer prices to remain at reasonable levels outside of government intervention.
There is roughly a 3% gap between what it costs manufactures to produce goods and what consumers are buying them at. I will wager this provides an increased probability we will see 7% plus CPI inflation this year. With that number being the base for higher moves closer to 9% or 10% during the first six months of 2022.
Info has already surfaced suggesting the Fed will be reevaluating how the calculate CPI inflation after 2021. This means even more government goosing of numbers that include more of what prices aren't going up, discretionary spending items. With less weight on essential items that everyone needs; food, shelter and energy.
I haven't even gotten to the point where we discuss house and rent increases. These numbers make up roughly 40% of the CPI and has been estimated increases are lagging significantly. Only around a 5% increase has been reported by the government. While independent surveys suggest an increase of more then 20%.
We also saw retail sails come in a lot lower then expected. Meaning consumers are spending way less on digressionary items but more on essentials. Prices are risings and everyone is being forced to cut out the non essentials. Not a good sign when all the Fed looks at is consumer spending.
Finally, the Fed had their December 15th FOMC meeting today. They did what I predicted and increased the pace of the taper to $30 billon a month from $15 billon. It is important to note they are still buying treasuries and mortgage backed securities, just significantly less of them. Putting some predictions of a conclusion to the buying around March 2022 with the first rate hike in April.
The markets have been pricing in around a 1.5% rate hike over the past few months. We won't get there all at once, probably not till the end of 2023. The irony of this nonsense is a 1.5% hike would do nothing to reduce inflation. We would need to see upwards of 5% or more to even make a dent. That’s not going to happen..
I would wager we don't even see the Fed get to 1% in 2022 before they have to come back in and save the markets.
They goosed this news with markets deciding to rally. Meaning they saw it coming and still expect the Fed to fight inflation. The inflation genie is out of the bottle and won't be able to go back in without the entire economy crashing down with it.
The PPI numbers suggest we still have a few months left of higher prints. The higher numbers could begin to cool around the time the taper is ending. Signaling to the markets and everyone the Fed was right all along.
Watch out for these false flags.
Even if this spout of CPI increases was caused by supply side issues. There are indicators out there suggesting slow downs in the economy are only just the beginning. Look out for yield curve discussion in the future.
For now no one should believe anything the Fed has to say. Their credibility has gone out the window since the Great Financial Crisis. Every time they taper and try to raise rates the markets tank. Then they have to come back in to rescue financial assets propping them back up.
With everyone talking about inflation the time has come to start looking at the other argument. A huge deflationary bust could be over the horizon. Furthering Fed credibility in ways that the average person wouldn't quite see. All signs point toward a Fed policy error in the near future. If there was ever a time to be talking about #gold it should be now. Yet everyone is silent on it. What is that telling you?