Inflation Up 0.8% Month-on-Month and Shows No Sign of Slowing

The latest seasonally adjusted inflation rate for January was 0.8% month over month. The non-seasonally adjusted annual rate came in at 7.87%. Both of these numbers were slightly above expectations.

Unlike last year, where one component made up the bulk of the move, the past several months have shown increases more evenly spread across the CPI. This shows that inflation continues to become more widespread. And there is no sign it is slowing down.

Figure: 1 Month Over Month Inflation

The YoY chart is even more concerning. The climb is slow and steady showing no sign of abating anytime soon. Keep in mind, the latest data point was calculated before the war started in Ukraine which will certainly exacerbate increasing prices in the months ahead.

Figure: 2 Year Over Year Inflation

The chart below compares the most recent numbers with the year-over-year monthly average. Commodities (which includes used cars) have come down recently, but Shelter has jumped above the 12-month average. Energy and Food are nearly double their respective 12-month averages with Transportation approaching 3 times the TTM average.

Figure: 3 MoM vs TTM

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 4.7% YoY, but actual market rates are nearing 14% YoY
  • More importantly, MoM CPI is 0.5% vs actual 1.4%. Annualizing these numbers produces a gap of 12%: 6.2% vs 18.2%!
• Food rose by 1% for the second month in a row
  • Meats, fish, and eggs were up 1.2% MoM
  • Dairy products were up 1.9% with Fruits and Vegetables up 2.3%
  • Food away from home was up “only” 0.4%. This number will most likely surge now that Covid is pretty much over.
  • Keep in mind, these are monthly increases!
• Energy was up an incredible 3.47% before the Russia/Ukraine conflict started. This accounted for 0.26% of the monthly 0.8% increase.
• Transportation was up 1.4% MoM driven by Car Rentals (3.5%), Vehicle Repairs (4.3%), and Airfares (5.2%)

Figure: 4 Inflation Detail

The full report can be found at the BLS. These price increases are occurring across the entire economy. It is astonishing these numbers are month-over-month when a few years ago these would have been normal for year-over-year increases.

Some categories will start to slow in the months ahead. If not, Airfares would increase 83% YoY! But even if some categories start to slow, others will accelerate. This is the danger of widespread inflation. It’s a vicious cycle that works its way through the economy feeding on itself. How can anyone expect inflation to slow in the months ahead?

Looking at the Fed Numbers

While the Fed does have different categories, their aggregate numbers match up with 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. The current spike is much larger than the one seen pre-2008 and more closely resembles the move in 1972 when prices went from 3% to 11% in under two years. That inflation proved “transitory”, falling back to 5% in 1976 before reaching 14.6% in 1980. Remember that if the methodology was the same, inflation would likely be above 15% already!

Back then, inflation only fell when Volker raised interest rates above the rate of inflation. With the Fed talking about 2.5% rates before the war in Ukraine, it seems unlikely the Fed will come anywhere close to the level needed to bring inflation back down.

Figure: 5 Fed CPI

Using the Fed categorical data, which is different than the BLS, the next chart shows the current period versus TTM and trailing twenty years. As can be seen, only Education and Medical Care are below the 12-month averages. Unfortunately, these two components represent about 12.5% of the total BLS weighting. The remaining 87.5% of the CPI is accelerating compared to the 12-month average.

Figure: 6 Current vs History

Historical Perspective

Recalculating the BLS number is not a perfect science. The weightings must be scraped from the web pages. The index data is then gathered using an API. Each index comes seasonally adjusted and unadjusted. Regardless, putting the historical data together provides a good perspective on the current period.

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.

Nothing about the chart below could make someone believe the problem will fix itself. Unclogging supply bottlenecks cannot bring the price of everything back down. Primarily because supply chain bottlenecks were caused by the massive increase in the money supply. The current trade deficit shows that this is clearly a demand problem and not a supply problem.

Figure: 7 Historical CPI

What it means for Gold and Silver

Gold has been a bit volatile since the war in Russia and Ukraine broke out. Peter Schiff actually thinks this may have been bad for gold in the short term, as it has temporarily strengthened the dollar and distracted the markets from weak economic data. In the medium to long term, the war only gives the Fed another excuse to slow the increase in rates.

If there is a quick resolution to the war, gold may experience a pullback as the safe-haven appeal is lost. Unfortunately for the economy, the damage has been done. With a global recession on the horizon, central banks around the world will have to moderate their “aggressive” tightening plans or risk creating a global depression. This will likely only add fuel to the raging inflation fire. There is no easy way out, but monetary stimulus (i.e., more inflation) is what politicians will pursue because it’s the path of least resistance.

Don’t be fooled. To quote Mike Maharrey who quoted Milton Freeman, “Inflation is always and everywhere a monetary phenomenon”. Protection from the obvious path ahead is about preserving purchasing power. For thousands of years, precious metals have been the best defense.

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

Data Updated: Monthly within first 10 business days

Last Updated: Feb 2022

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