We May Not Have Hit Peak Inflation Yet…

The latest seasonally adjusted inflation rate for April came in higher than expectations at 0.34% MoM and 8.28% YoY. The main driver for the MoM slowdown was a fall in Energy prices.

Although Energy fell by the most since April 2020, the rest of the categories were all positive. Furthermore, as the data below shows, many categories are still accelerating when compared to their 12-month averages. It’s also not likely that the fall in energy prices will continue due to multiple headwinds such as more sanctions on Russia and the WSJ expecting country-wide blackouts due to shortages.

Figure: 1 Month Over Month Inflation

The YoY chart shows that Commodities are also falling from the peak reached this February. Commodities contain Used Cars which have been a major driver of inflation. Another key takeaway from the chart below is the impact that Food is having on the YoY CPI. On a weight-adjusted basis, Food makes up 1.3% of the 8.3%.

Figure: 2 Year Over Year Inflation

The chart below compares the current month to the twelve-month average. Only Commodities, Energy, Household Ops, and Waste Management are below their 12-month averages. Those categories constitute 31.7% of the total CPI. This means that nearly 70% of the CPI weighting is above the 12-month average! How does that constitute slowing inflation?

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.

Some key takeaways:

• According to the BLS, Shelter is up 5.1% YoY, but market reports show rent increases closer to 15% and actually moving up faster than April 2021!
• Food is up almost 10% YoY
  • This could get worse as the Ukraine/Russia conflict disrupts core food production
• After a fall of -0.4% in March, Commodities were up .18% in April
• Transportation was the big standout, rising 3.07% in a single month!
  • This was driven by Airfares increasing 18.6% MoM and 33.3% YoY

Figure: 4 Inflation Detail

As the table above shows, last April YoY was reported at 4.16% which was very high at the time. Most pundits were calling it peak inflation. Since then, inflation has doubled! Once again, pundits are now calling March peak inflation because of the perfect storm of events that should be fading.

Unfortunately, most pundits are blaming inflation on supply chains and Putin. They fail to see the Fed’s role in creating so much inflation as shown in the money supply and balance sheet data. The Fed is now tightening, albeit very slowly. However, each month where inflation does not slow is another month closer to when the Fed will have to reverse course in a high inflation environment once the recession from increased rates sets in.

Looking at the Fed Numbers

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

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.

Figure: 5 Fed CPI

Using the Fed categorical data, which is different than the BLS, also shows that most categories are still accelerating. In the chart below, Apparel saw a big drop. This was driven by a large drop in Women’s suits, Men’s pants and shorts, and Jewelry Watches. This is most likely a result of consumers having less discretionary income to spend on non-essential goods. These categories are most likely a leading indicator of the recession ahead.

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 rates well below the inflation rate.

Figure: 7 Historical CPI

What it means for Gold and Silver

After an initial sell-off upon the data release, gold has rallied hard from an oversold position. The rest of the market followed suit except for bonds and the dollar which are still down as of publishing. Is the market slowly waking up to the real bind the Fed is in? Inflation is not coming down on its own and the categorical data suggests peak inflation may still be ahead!

Unfortunately for the Fed, every month of high inflation that goes by brings the markets closer to the “everything bubble popping” without also seeing relief in inflation. This means that their runway keeps getting shorter and shorter. This is especially true given that only a (temporary?) fall in energy prices restrained inflation this month.

In an ideal world for the Fed, they engineer a soft landing by slowing inflation with the economy slowing some. By the time the economy comes close to recession, or even enters a mild one, inflation is low enough that they can stimulate the economy again. Peter Schiff has equated this to a magician pulling the table out from under the dishes and hoping the dishes stay levitated. This seems even more true with the Economy halfway to a recession already!

The Fed is trying to pull off a miracle. Their margin of error was minuscule to begin with and continues to shrink. Each passing rate hike where inflation does not slow materially brings the markets that much closer to the brink. Each month the Fed gets closer to the ultimate decision when it is forced to decide whether to save the dollar or everything else.

Under either scenario, physical precious metals offer great insurance. Especially when the most probable move by the Fed is to sacrifice the dollar.

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

Data Updated: Monthly within first 10 business days

Last Updated: Apr 2022

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