CPI 1.2% MoM and 8.6% YoY – Is this Peak Inflation?

The latest seasonally adjusted inflation rate for March was 1.21% month over month, with a non-seasonally adjusted annual rate of 8.56%. Both of these numbers came in slightly above expectations, which were elevated due to the war in Ukraine.

The current increase is driven largely by a rise in energy prices which contributed .83% to the MoM move. This makes up 68% of the 1.21% move.

Figure: 1 Month Over Month Inflation

The YoY chart is more concerning because it shows the price increases as more widespread. Energy is certainly a large component, but so are many other items.

Figure: 2 Year Over Year Inflation

Many people are now calling this peak inflation. The latest month was the perfect storm for many reasons:

• The war in Ukraine caused a spike in energy prices, but those increases have largely dissipated
  • Oil peaked at $130 and is back at $100
  • If Energy returned to Jan levels (.08%), the MoM CPI would have been .45%
• The inverted yield curve is now predicting a recession which should lessen aggregate demand
• Supply of goods is coming back online to match the surging demand from last year
  • This occurs just as demand is potentially falling
• The next three months will see high CPI months from last year fall off (April .65%, May .7%, and June .89%)
  • This will decrease the YoY view unless the same months produce larger numbers this year
• Higher interest rates should cool the housing market
• The Fed is getting “aggressive” on inflation

The first four are valid, not so much the fifth. On the flip side there are other components that could continue fueling inflation:

• China is back in lockdowns which could disrupt supply chains again
• Inflation has started to bleed over into services
• There is a potential massive food shortage coming
• Energy prices should rebound into the summer months
• Inflation expectations have started to increase dramatically
• The CPI understates true cost increases quite a bit
• The Fed is actually not being aggressive

The outcome is certainly not clear-cut. The data also shows a mixed picture. Below is the current month vs the trailing twelve months. The data shows that some prices have fallen below the TTM average such as Commodities (used cars are coming back down), Education, Household Ops, and Waste Management.

On the other side, Energy, Food, Shelter, Medical Care, Transportation, and Recreation are all above the 12-month average. Furthermore, these components are much larger than the components that are shrinking, except for Commodities which account for 21.8% of the CPI.

Figure: 3 MoM vs TTM

It’s certainly hard to argue that inflation is subsiding when so many components are still seeing an acceleration in price increases.

The table below gives a more detailed breakdown of the numbers. It shows the actual figures reported by the BLS side by side with the recalculated and unrounded numbers. The weighted column shows the contribution each value makes to the aggregated number. Details can be found on the BLS Website. Keep in mind, these numbers are specifically engineered to understate inflation.

Some key takeaways:

• According to the BLS, Shelter is up 5% YoY, but Bloomberg reports rent increases were up 12.6% in January
  • Miami had a 39% YoY increase!
• Food rose by 1% for the third month in a row
  • This could get worse in the months ahead as the Ukraine/Russia conflict disrupts core food production
• Commodities are still up 11.7% YoY despite a fall of -0.4% in March

Figure: 4 Inflation Detail

The MoM and YoY diff columns are very important to highlight here. It shows that MoM saw a decrease in 7 of 11 categories. Furthermore, the surge in Energy prices will most likely dip in April. This could potentially create a very modest print in the CPI for April.

That being said, comparing this March to last March shows only one category (Education) as rising slower than a year ago. If that holds true for April, then the TTM inflation could continue to increase.

Looking at the Fed Numbers

While the Fed does have different categories, its aggregate numbers match to the BLS.

Their data goes back to the 1950s. Unfortunately, they do not publish the weightings of each category so it would be impossible to do a similar analysis showing the impact of each category on the overall number.

Looking at history back to 1950 puts the current spike into perspective. Remember that if the methodology was the same, inflation would likely be above 15% already! Unfortunately, this time around, Paul Volker is not pushing rates above the rate of inflation so it’s hard to think the Fed is going to slow inflation.

Figure: 5 Fed CPI

Using the Fed categorical data, which is different than the BLS, also shows a concerning chart. The plot below shows that only 2 categories (Education and Recreation) are below the 12-month average.

Figure: 6 Current vs History

Historical Perspective

The BLS weightings have only been scraped back to 2012, thus the chart below shows the past 10 years of annual inflation data, reported monthly. The volatility in Energy can be seen clearly over this time period.

Whether this is the absolute peak in 12-month inflation or not, the chart shows no signs of reversing anytime soon. Especially while the Fed is still throwing fuel on the fire with accommodative policy.

Figure: 7 Historical CPI

What it means for Gold and Silver

March 2022 could go down as peak inflation for this cycle, maybe. If it was measured honestly, it would certainly be the highest inflation in the modern era, well above the peaks from the 1970s. The dollar is losing value rapidly.

Even if March produced a perfect storm for a high CPI print, that does not mean price increases will all of a sudden come crashing back down. A recession will not save the Fed from high inflation. Especially when Congress will most likely come to the rescue and go back to stimulative measures. Unfortunately, the Federal government could quickly find itself in a major bind as rising interest rates will quickly devastate the government finances. This means the Fed will have to step in.

The Fed is in a clear lose-lose situation. Either they finance the budget deficits or they let the entire economy implode. While they will most likely choose the former, either scenario will create extreme market environments. Having physical gold and silver is an excellent insurance hedge during such turmoil.

Data Source: https://www.bls.gov/cpi/ and https://fred.stlouisfed.org/series/CPIAUCSL

Data Updated: Monthly within first 10 business days

Last Updated: Mar 2022

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