A Runaway Inflation Freight Train the Fed Won’t Stop

The producer price index rose at the fastest rate in the history of the data set in November. This is a runaway inflation train hurtling down the tracks toward consumers. And despite all the talk, the Fed won’t be able to stop it.

The Producer Price Index (PPI) rose by 0.8% month-on-month in November. The expectation was for a 0.5% gain. Year on year, producer prices were up a whopping 9.6%. That was the biggest increase since the series was revamped in 2010.

This comes on the heels of Friday’s report than consumer prices charted their biggest gain since 1982.

We continue to see a large gap between producer and consumer prices. Ultimately, producers of goods and services will pass at least some of these increasing costs on to their customers. That means consumers will see more price hikes in the future as producers endeavor to recoup costs.

In fact, companies already are passing on these costs. According to a November survey of 560 firms by Vistage Worldwide, 60% of small business owners have raised prices in the previous 90 days.

In other words, the inflation train is still rumbling down the tracks toward American consumers at breakneck speed.

Gold fell about 1% after the PPI data came out. With the transitory inflation narrative dead, the markets now expect the Federal Reserve will go to war against inflation with faster monetary policy tightening.

The December Fed meeting will wrap up Wednesday. Most observers think the central bank will speed up its asset purchase taper and wrap it up sooner than initially projected. This would put rate hikes on the table sooner rather than later.

This will likely happen. But nobody is asking the more fundamental question: can the Fed win this inflation fight? Can it stop this runaway train?

I don’t think so.

As Peter Schiff pointed out in a tweet, the only way to fight inflation is with positive real interest rates.

That means rates have to be higher than the CPI. This will cause people to borrow and spend less, and save more. But it will also cause another financial crisis, which is why the Fed won’t fight inflation!”

The annualized CPI for 2021 is over 7%. And that’s using the cooked government numbers. The real inflation rate is higher than that. If you use the CPI formula the government used in the 1970s, inflation is running close to 15%. Paul Volker had to raise rates to 20% in order to slay the 1970s inflation dragon.

Do you really think the Fed can raise interest rates to that level without crashing an economy built on artificially low interest rates, borrowing and money printing?

The last time interest rates were over 7% was December 1990. A 5.25% interest rate was the pin that popped the housing bubble in 2006, leading to the 2008 financial crisis and the Great Recession.

In a recent podcast, Peter said the Fed is picking a fight it cannot win. It can’t stop the runaway train. But the markets still don’t seem to understand that what the Fed claims it’s planning to do to fight inflation amounts to nothing.

There is no way that merely finishing the taper a couple of months early and raising interest rates slightly above zero, maybe 50 basis points – hell, maybe they even go all the way up to 1%. That’s nothing in the face of the type of inflation that we already have. So, if the Fed is serious about fighting inflation, it’s going to take a lot more than what it’s indicated it’s willing to do. And of course, if it actually does that, the markets would implode.”

We already know the Fed playbook. When the markets inevitably crash and the economy begins to spiral toward recession, the central bank will stop tightening and reverse whatever rate hikes it managed to implement. And then it will go straight back to quantitative easing. In other words, at the first sign of economic trouble, the Fed will almost certainly surrender to inflation and go right back to its inflationary policies.

But people are selling gold.

Peter summed up the situation in another tweet.

Traders again reacted to worse than expected inflation data by selling gold. The worse inflation gets the more aggressively traders expect the Fed to get to fight it. That the Fed already let inflation get this bad proves that it won’t do anything to stop it from getting worse.”

The train is coming. The Fed can’t stop it.