Peak Inflation? Not So Fast!

The March Consumer Price Index (CPI) was 8.5% annually, the highest since December 1981. But the mainstream narrative was that inflation had probably peaked because core inflation, stripping out more volatile food and energy, “only” rose by 0.3%.  Mainstream pundits reasoned that the oil shock in the wake of Russia’s invasion of Ukraine primarily drove the huge 1.2% month-on-month CPI gain. And since core CPI appeared to be slowing, inflation was cooling.

The April CPI data undercuts this narrative.

The April CPI data was a mirror image of last month’s, with a cooler headline number, but a big spike in the core. If a decrease in the March core inflation number meant CPI peaked last month, it seems logical to conclude that the big jump in the core April means the “peak” was just a head fake.

The headline CPI numbers did cool slightly last month, coming in at 8.3% year-on-year. While this was down from March’s blistering hot number, it was higher than the projected 8.1% gain and remains close to 40-year highs.

On a monthly basis, CPI rose by 0.3%. This was significantly down from March’s huge gain but was also higher than expected. Analysts had projected a 0.2% month-on-month increase. The big drop in the month-to-month CPI was primarily driven by stabilizing gasoline prices. Energy prices were down 2.7% for the month, including a 6.1% decrease in the price of a gallon of gas. The bad news is gas prices are on the rise again. The average price of gasoline nationwide has risen 7 cents this month.

Meanwhile, every other category in the CPI calculation rose.

Stripping out food and gas, core CPI was up 6.2% year-on-year versus a consensus expectation of a 6.0% gain. More significantly, the month-on-month core CPI came in 0.6% higher versus a 0.4% estimate. That 0.6% month-on-month rise was double March’s 0.3% increase that we were supposed to be excited about because it meant “peak inflation.”

Housing costs continue to inch higher, even using the government’s make-believe “owner’s equivalent rent” calculation. The housing index was up another 0.5% on the month and this significantly understates the actual rise in housing costs.

Americans are feeling the pinch of inflation. Wages are up but consumers are worse off. Average hourly earnings have risen by 5.5% over the last year. But factoring in rising costs, real earnings are down 2.6%. Real wages fell another 0.1% on the month, despite a 0.3% increase in nominal wages.

And as bad as the numbers are, it’s actually worse than that. This CPI uses a government formula that understates the actual rise in prices. Based on the CPI formula used in the 1970s, CPI is approaching 17% — a historically high number.

There is every reason to believe prices will continue to rise. While the mainstream blames, Russia, COVID, supply chains, excessive demand, and perhaps voodoo for rising inflation, they completely ignore the most significant factor – actual inflation created by the Federal Reserve.

Remember, rising prices are not in and of themselves “inflation.” Inflation is an increase in the money supply. Rising prices are a symptom of inflation. Loose central bank monetary policy drives the money supply up.

The Fed took a weak swing at inflation during its May meeting, raising interest rates by 1/2%. But at .75%, interest rates remain historically low. Meanwhile, the Fed doesn’t plan to begin shrinking its balance sheet until June. And at the proposed pace, it would take over 7 years to decrease the balance sheet back to pre-pandemic levels. This is still an exceptionally loose monetary policy, meaning the central bank is still spraying gasoline on the inflation fire, albeit at a slightly reduced rate.

My guess is that the central bankers at the Fed hoped April CPI would cool enough for them to slow the roll on raising interest rates and let them avoid quantitative tightening. The stock market is already tanking and the economy looks increasingly shaky and the central bank is just getting started. Will the Fed push forward with its plan to tighten monetary policy and wreck the economy? Or will it surrender to inflation?

In a tweet, Peter Schiff said the Federal Reserve has already lost the inflation war.

Stocks and bonds are selling off as investors realize the Fed must fight harder to defeat inflation. What they don’t realize is that inflation has already won and the Fed will soon stop pretending to fight it.”

Meanwhile, President Biden’s inflation-fighting plan seems to involve spending more money. That means more borrowing and more debt the Fed will ultimately need to monetize.

The Fed and the US government certainly haven’t guided us beyond peak inflation. We’re still climbing the mountain. They can wish it all they want, but wishful thinking doesn’t change the numbers.