They Expected Inflation to Come in Hot in October; It Came in Sizzling

The consumer price index was expected to come in hot yet again in October. It came in sizzling.

The actual CPI numbers for last month were even hotter than expected as “transitory” inflation remained well above 5% on an annual basis for the sixth straight month.

The projection was for the CPI to be up 0.6% month-on-month. That would have been a significant increase. But the actual number was even higher, with CPI up 0.9%. On an annual basis, the inflation rate was 6.2% compared with a 5.9% estimate. It was the highest annual CPI gain since 1990.

The total CPI gain for 2021 now stands at 6.3% with two months to go. The annualized gain is 6.84%. That’s more than “moderately” above the Fed’s mythical 2% target.

Stripping out volatile food and energy prices (as if consumers don’t have to eat or put gas in their car) core CPI was up 0.6% against the estimate of 0.4%. Annual core inflation came in at 4.6% compared to a projection of 4%. That was the highest annual core CPI leap since August 1991.

Keep in mind, these numbers are based on a government CPI formula that is created to understate actual inflation. If the government still utilized the formula to calculate inflation that it used in the 70s, we’d already have double-digit inflation.

After the September CPI numbers came out, Peter Schiff said the CPI doesn’t accurately reflect reality.

I think the reality that Americans are facing when they shop is year-over-year inflation rates, or annualized inflation rates, north of 10%. So, we really have double-digit inflation if the government were accurately reporting it.”

Meanwhile, producer prices continue to run ahead of consumer prices. The Producer Price Index charted a 0.6% month-on-month increase with the annual rate up 8.6%. That tied last month’s record-setting rise in producer prices. PPI for commodities skyrocketed 22.2% year-over-year. That was a 48-year high. The last time we saw a higher commodity PPI was November 1974.

The media tends to focus on consumer prices, but as Schiff pointed out in his podcast, businesses ultimately have to recover the cost of production.

Consumers should be concerned about the prices that producers pay. But they generally don’t start to worry until those higher costs get passed on to them in the form of higher prices.”

It appears we’re seeing that begin to happen now.

Higher producer prices don’t bode well for the “transitory” narrative. With producer prices still running ahead of consumer prices, there is a high likelihood businesses will be passing more costs on to consumers in the months ahead.

The Biden administration finally acknowledged higher prices, conceding they hurt Americans’ pocketbooks. But the White House statement essentially blamed them on rising energy prices and “price gouging” — as if that could cause widespread price increases across the entire economy. There is no acknowledgment that printing trillions of dollars out to thin air and showering Americans with stimulus money might be a factor in this inflationary whirlwind.

Treasury Secretary Janet Yellen continues to push the “transitory” inflation narrative. She once again claimed it’s just a byproduct of the economic recovery and insists the Fed won’t let inflation get out of control. She said, “I’d expect price increases to level off, and we’ll go back to inflation that’s closer to the 2% that we consider normal.”

Of course, even if inflation does fall back to “normal,” that doesn’t mean prices will drop back to levels we saw before this burst of inflation. Price increases are forever. Yellen simply means the cost of living will increase 2% from the new higher price level.

Apparently, not everybody is buying the “transitory” inflation mantra anymore. Gold rallied on the inflation data and rose above $1,850 an ounce interday. But a dollar rally created some headwinds for gold later in the day. The notion that the Fed can successfully fight the inflation monster still has life. In a tweet, Schiff said the dollar rally makes no sense.

The fact that the dollar is losing purchasing power much faster than expected doesn’t make the dollar more valuable. Yet traders are buying dollars because they naively expect the Fed to tighten policy to fight inflation. That’s a losing bet.”

Meanwhile, average real weekly earnings have gone negative. In other words, wages aren’t keeping up with rising prices. This underscores the fact that inflation is a tax and it hits the middle class and working people the hardest. As Schiff noted in a recent interview with Megyn Kelly, the rich tend to own assets that increase in value as inflation rises.

But unfortunately, a lot of middle-class Americans don’t own those assets. They just get stuck with the bill. They earn wages, but their wages don’t rise nearly as much as the cost of living. And so, even though they get a bigger paycheck, they’re actually earning less, because when they go to spend those dollars, they can’t buy nearly as much stuff.”

When stimulus money started flowing during the pandemic, a lot of Americans said, “Yay! Free money!” But nothing the government does is free. As Schiff told Kelly, every dollar of government spending has to be paid for.

Every dollar of government spending needs to be paid for. And so, if it’s not paid for through taxation, it’s paid for through some other means, and that is inflation. And just because the Federal Reserve prints money and gives it to the government to spend, it doesn’t mean that we’re getting all that spending for free. We’re going to pay much higher prices for consumer goods. And that means Americans are going to have to reduce their spending because everything is going to cost a lot more. And since we don’t have an unlimited amount of money people are going to buy a lot less, which is exactly what would happen if their taxes went up.”

Government borrowing and spending always come with a price. We’re paying that price today.