June YoY CPI Was Horrific – The Next Three Months Could Be Worse

The latest seasonally adjusted inflation rate for June came in at a blistering 1.35% MoM and 9.11% YoY, beating expectations of 1.1% and 8.8% respectively. All prices rose in May with 8 of 11 categories rising faster than the 12-month trend, representing 94.7% of the total CPI.

It was possible that YoY inflation could have dipped this month since last June .89% was falling off. At that time, .89% seemed like an impossible number to beat. Unfortunately for consumers, the latest month exceeded that figure by more than 50%!

What is more concerning is that this was the chance for the YoY CPI to dip before the July – September stretch. As shown in the chart below, that stretch last year produced CPI prints of 0.46%, 0.32%, and 0.41%. Gas prices have already started to cool, which means the July number should come in much lower than 1.35%. However, if the next three months do not come in below 1.19% combined, then YoY inflation is set to keep climbing in the months ahead.

Figure: 1 Month Over Month Inflation

The CPI analysis in months past talked about how the price increases were becoming more widespread, extending beyond Used Cars (Commodities). The chart below shows this to be the case as all components are contributing to the rise. Energy prices have really started to take a big bite, representing 2.98% of the 9.11%.

Figure: 2 Year Over Year Inflation

The chart below compares the current month to the 12-month average. Only Household Ops, “Other”, and Recreation were below the 12-month trend which compromise 5.3% of the CPI.

• • Energy was up 7.5% vs a 2.9% 12-month average
  • Shelter, the largest component, was up .6% vs .5% average
  • Transportation was up 2.1% vs 0.7%

The Fed is still projecting that inflation falls back into the 2%-3% range by the end of next year and that it will cool significantly by the end of this year. They have been way wrong in every forecast they have made so far. Will the months ahead prove any different?

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.

Some key takeaways:

• • According to the BLS, Shelter is up 5.61% YoY, but actual rents are up 14% YoY and have broken records for 13 months in a row!
    • • Some cities like Miami saw increases above 40%!
      • Owners Equivalent Rent continues to massively understate the actual market. With real rents the CPI would be well above 10%, not to mention the other manipulations that exist in the calculation
  • Food is up more than 10% YoY
    • • This could get worse as the Ukraine/Russia conflict disrupts core food production
  • Energy is up an incredible 41.5% YoY

These numbers are simply astonishing. Many of the monthly gains would be shocking if they were annual gains.

Figure: 4 Inflation Detail

Looking at the Fed Numbers

While the Fed does have different categories, its aggregate numbers match 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!

How has the Fed responded historically to very high inflation? Increasing the Fed Funds rate to above the rate of inflation (gray line). This time around, the response by the Fed is so weak it can barely be seen (a tiny uptick on the far right side). The Fed is miles behind inflation and still hoping it will slow on its own.

The Fed will not be slowing down inflation with their weak and very late rate hikes. However, they will most certainly prick the everything bubble. Their meager interest rates are already being felt by the Treasury which owes an extra $100B a year on interest payments.

Figure: 5 Fed CPI

Using the Fed categorical data, which is different than the BLS, shows that all but two categories are above the 12-month trend. Not only have they completely missed the boat on transitory inflation, but they continue to underestimate the rate of inflation going forward.

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.

The YoY CPI first went over 4% in April of 2021. For the CPI to come back down to below 4%, the monthly numbers would likely have to turn negative. This is very unlikely to happen which will once again prove the Fed is completely wrong in its forecasts.

Figure: 7 Historical CPI

What it means for Gold and Silver

The Fed is still fueling this inflation fire with real interest rates deeply negative and a bloated balance sheet that has still not begun to shrink.

The latest inflation reading has actually put a 1% rate hike on the table for the next Fed meeting in 2 weeks. There is a 40% chance of a 1% hike and a 0% chance of anything below .75%.

Ironically, a 1% hike by the Fed would be considered extreme by most market participants, but would still not be nearly enough to bring down inflation. As Figure 4 shows above, the Fed is miles behind the inflation curve. 1% is not enough to bring rates even close to positive. 1% is enough to absolutely crush the everything bubble which includes stocks, real estate, and crypto.

Gold and silver have been under immense pressure lately, but the Fed is quickly running out of runway. They have been talking tough to avoid having to do anything. That is not happening. The Fed will be forced to fight inflation until the Recession blows up in their face.

This won’t be a mild recession. If 3 years of 1% rates created the Great Recession, what has more than a decade of 0% interest rates created? We may soon find out. Don’t expect the Fed to sit by and watch everything implode. They will pivot, regardless of inflation. They will blame inflation on supply chains, Russia, and China to allow them to return to easy money. The markets will predict this long before it happens, and gold and silver will take off. Are you prepared? Why not capitalize on the best buying opportunity in years?

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

Data Updated: Monthly within first 10 business days

Last Updated: Jun 2022

Interactive charts and graphs can always be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/USDebt/