Inflation is a massive problem that can no longer be hidden

By:
on Apr 12, 2022
Updated: Apr 13, 2022
  • CPI inflation for March comes in at 8.5% YoY
  • Highest since 1981, when interests rates were 13%. They are now 0.33%.
  • Recession could be on the horizon as Fed out of options

Yesterday, the White House came out with the below video, warning the public that the inflation readings were going to be “extraordinarily elevated”. That in itself is the first qualm I have – the very fact it is being done at all.

Why do insiders need to know the CPI reading ahead of time, preparing speeches to try justify the figures and mitigate the fallout? Just release it and face the music – trust that the people are smart enough to make judgments for themselves. Unless, of course, these readings are so bad that you need to spin the story.

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Yesterday’s foreshadowing by the White House of “extraordinarily elevated” inflation numbers

Blame Putin

The second issue I have with the above announcement, and this applies to politicians’ responses in general, is the use of Putin as a scapegoat for inflation, blaming him for dumping gross inflation on all our doorsteps. Look, I have no interest in defending Putin, but he did not create this inflation.

We expect March CPI headline inflation to be extraordinary elevated due to Putin’s price hike

Sure, it has of course been worsened by the Russian invasion, but referring to this as the “Putin price hike” rather than “outrageous inflation sparked by our unprecedented money printing” is simply incorrect. What’s more, I would actually go as far as saying it is completely condescending to the American people, to think that they will buy the argument that all the money printing has not affected inflation.

Russia invaded Ukraine four days before the end of February. That is only six weeks ago! February inflation per the CPI was 7.9%, while January inflation came in at 7.5%. Putin is to blame for a lot of problems in the world right now, but inflation isn’t one. You don’t need to be an economist to see that.

Why is the US worse?

As a reminder, inflation in the US is worse than just about everywhere else on the planet right now. I read this paper, published last week by the Federal Reserve Bank of San Francisco, which I thought gave some good colour to this debate, which really should not be a debate at all.

“Inflation rates in the United States and other developed economies have closely tracked each other historically”, one poignant section reads, “However, since the first half of 2021, US inflation has increasingly outpaced inflation in other developed countries. Estimates suggest that fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed to this divergence”.

In other news, I am currently writing a paper to try ascertain if the sun rises in the East, if the sky is blue, and if a one legged duck swims in a circle.

On the bright side, we seem to be transitioning away from the bogus excuse that was “inflation is transient”, which was, before Putin, the calling card of the White House.

While, admittedly, several high-profile defenders of the transient angle seem to have conceded on this point, the cynic in me simply thinks this may very well be due to the fact midterm elections are around the corner.

I agree with the thoughts of Richard Curtin, an economist who has taken charge of the University of Michigan survey since 1976, when he says “the Biden administration made a critical error in saying it would be transient and people should just tough it out. It wasn’t transient. A lot of people couldn’t just tough it out. And it caused a big loss of confidence in (Biden’s) policies.”

As a reminder, we are now over two years into the pandemic. Let’s take a visit to the dictionary:

Now maybe I’m drinking poor-quality whiskey, but the warming effect I feel certainly does not last for over two years.  

The Actual Numbers

You know, I haven’t actually mentioned what the number is. Well, it’s 8.5%. This would normally be the part where I would mention how understated that is; that the CPI inflation metric is misrepresented. But honestly, that number is so high as it is, I’m not even going to bother opening that can of worms. But, just to be clear, there is simply no way the CPI is capturing what every day people are experiencing here with that 8.5% figure.

This month’s 8.5% is the highest CPI number since 1981.

Back then, however, the Fed funds rate was at 13%. Today? It’s 0.33%. Meaning that in real terms, we are in a completely unprecedented environment. The chart below will show that – look at the real rate back in 1981, the last time CPI was this high.

Today, the real rate is starkly negative at -8.2%.

Drivers

Let’s dig deeper now into the CPI report and assess the drivers of this 8.5%:

  • Gasoline +48.0%
  • Used Cars +35.3%
  • Gas Utilities +21.6%
  • Meats/Fish/Eggs +13.7%
  • New Cars +12.5%
  • Electricity +11.1%
  • Food at home: +10.0%
  • Transport: +7.7%
  • Food out of home: +6.9%
  • Apparel +6.8%
  • Shelter +5.0%

Gas at 48% makes sense compared to March 2020, given then Russian invasion – as the price of gas was already high before Putin exacerbated the situation. The most prominent figure for me, by far, is the 10% on food at home. When you sit back and think about that, that is astonishing. American families are currently paying 10% more to put food on the table, compared to March 2021.

As well as shocking, it’s also just really sad. Inflation disproportionately affects the lower income brackets. Those people hit hardest by the 10% rise in food are not the same people who have ample assets to protect themselves. They aren’t apeing into Dogecoin, they’re not sitting on a basket of US stocks and they don’t have a wallet full of bitcoins. For those making ends meet, it’s absolutely devastating.

Wages

I also came across the below chart this morning, posted by Charlie Bilello, CEO of Compound Capital Advisors. Because you can’t write about inflation and not mention wages. So, while we have seen inflation skyrocket, wages have also risen, and by a healthy 11.1% over the course of the pandemic. However, on a real basis, wages haven’t moved at all.

All of the US wage growth since the start of the borrowing/printing binge has been a mirage, up 11.1% in nominal terms but 0% after adjusting for inflation

Charlie Bilello

This is not going to improve anytime soon, either. Supply chain disruptions, the Russian war, and increased fertiliser prices driving up agricultural costs all combine to paint a pretty grim near-term future.

We have a problem.

Money Printing

I’m not going to spend long here.

I actually vividly remember having a conversation with my Dad when I was, maybe, eight years old. I couldn’t wrap my brain around the fact that if the government can print money (something I had been shocked to find out was possible), then why couldn’t they just gift it to the poor and solve everyones’ problems? I just could not understand the concept of inflation when he tried explaining it to me. It bothered me for years.

So while you can hoodwink a naïve eight-year-old (this was shortly after the time I was heavily influenced to support Newcastle, a decision I did not realise at the time would have such stark consequences for my future stress levels), it’s patronising to try to pull the wool over the American populations’ eyes. Maths was always my favourite subject, because stuff is either right or wrong – there’s no in-between. And it’s a mathematical certainty that if you print money, you will get inflation.

And yeeeesh, has the US printed a colossal amount of money. In fact, by the end of 2021, 80% of dollars in existence had been printed in the prior 22 months. Debt is now over $30 trillion. So yeah, you’re going to see inflation – in the same way that if you add 1 + 1, you’re going to get 2. It’s maths; it’s certainly not a war in Ukraine that started six weeks ago.

Fed Hikes and the future

Finally, I’m going to close with a look towards the future. And it’s probably the worst bit, because I’m not exactly optimistic as to how this is all going to be resolved. There is no easy solution. With CPI at 8.5%, alternative measures of inflation are comfortably in the double digits – which is crazy to think about with regard to the United States of America. Who would have thought we would ever see that?

I hear Jack is a smart guy. This prediction isn’t looking so outlandish six months on…

The rate hikes will be coming thick and fast, more aggressively than a lot believe. Looking at the yields in the market now, Jim Bianco posted the below tweet this morning assessing what the market is currently expecting. Over ten hikes are now priced in for 2022!

The Fed is out of options. Inflation is now officially scary. And while the US government continue to pretend like all is just swell, simple maths and logic dictates that there is no easy way out of this. For so long now, the Fed has done everything in its power to avoid a recession and keep stocks propped up.

As it turns out, the only thing that was transitory was the Fed’s ability to keep everything running along smoothly.   

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