The CPI Mirage

Price inflation continued to cool with March headline annual CPI coming in at 5%. This was lower than expected and may give the Federal Reserve some wiggle room to slow down or even end rate hikes.

But it’s a mirage.

Despite the cooling trend, price inflation remains well above the Fed’s target and victory in the inflation fight isn’t imminent.

Month on month, CPI was up just 0.1%. That was better than the projected 0.2% increase. Another big drop in energy prices helped push overall CPI down. This was the number trumpeted by mainstream media.

But the core CPI numbers cast some doubt on the notion that the Fed is winning the inflation fight.

Stripping out more volatile food and energy prices, core CPI was up 0.4%. Over the last 12 months, core CPI was up 5.6%.

While overall CPI has fallen, core CPI has held steady in recent months, rising by 0.4% in January, 0.5% in February, and 0.4% in March.

The mainstream’s new favorite inflation measure – supercore inflation, which strips out shelter prices along with food and energy – was up 0.2% month-on-month and 3.4% on an annual basis.

You will notice that all of these numbers are well above the Fed’s 2% inflation target.

Keep in mind, inflation is worse than the government data suggest. This CPI uses a formula that understates the actual rise in prices. Based on the formula used in the 1970s, CPI is closer to double the official numbers.

A 3.5% drop in energy prices month-on-month, along with a drop in food prices away from home helped moderate headline CPI. The only other categories charting price decreases were used vehicles and medical services.

In a tweet, Peter Schiff noted that despite cooling CPI, signs of inflationary pressure remain.

Instead of looking backward at somewhat lower past CPI gains, investors should instead be looking forward. Recent strength in oil and weakness in the US dollar both evidence a persistent inflation problem and portend much higher future CPI increases. Stagflation is here!”

Gold rallied after the report came out as markets assumed the cooling CPI means the Fed can declare victory over inflation and will ease off rate hikes. Schiff addressed this in another Tweet.

The catalyst for this morning’s $20 jump in the gold price is the Mar. CPI rising a bit less than expected. But core CPI still spiked .4%, which annualizes to over 5%. The real reason gold is rising is that high inflation is here to stay. Soon YoY CPI gains will hit new highs.”

In fact, the central bank went back to creating inflation after the failure of Silicon Valley Bank and Signature Bank.

The Federal Reserve and US Treasury rushed in with a bailout scheme that includes a program allowing banks to borrow money using bonds that have been significantly devalued by rate hikes as collateral based on their face value. Last month, the Fed added $324 billion to its balance sheet.

This seems to have stabilized the banking sector for the time being, but JPMorgan Chase CEO Jamie Dimon recently said the banking crisis isn’t over. And the collapse of these banks reveals the fact that this economy can’t run in a high interest rate environment. It’s only a matter of time before something else breaks. There are already signs of trouble in commercial real estate.

This puts the Federal Reserve in a bad situation. It needs to cut rates as soon as possible before the economy comes crashing down around its ears, but even with CPI cooling, it can’t plausibly claim victory in the inflation fight. As Schiff noted in a third tweet, despite all of the rate hikes, money is still too easy.

The Fed Funds rate is still below the official inflation rate and even further below the actual rate. Given that the CPI has likely bottomed, as it heads higher the Fed will need to raise rates just to avoid easing further.”

The bailout may have bought the Fed some time so it can carry on the inflation fight theater for another act or two, but in reality, the scheme was effectively a return to money creation and an end to monetary tightening. Even though the Fed raised rates again in March, the show is effectively over.

The ugly truth is the US economy is addicted to easy money. It is addicted to artificially low interest rates and quantitative easing. You can’t take an addict’s drug away without sending him into withdrawal.

It’s easy to get caught up in the weekly data releases, but it’s important to keep your focus on the fundamentals and the bigger economic picture. The fact is, the Fed pumped trillions of dollars into the economy starting after the 2008 financial crisis and then doubling down during the pandemic. The price inflation we’re experiencing today is a symptom of that monetary malfeasance. The Fed can’t fix this problem with some rate hikes and a modest decrease to its balance sheet. It needs to pull trillions of dollars in liquidity out of the economy.

And it can’t.

But the tightening it has already done is enough to pop the bubbles and cause an economic earthquake. We’re already feeling the first tremors.