Peter Schiff: Clueless Investors and Economists Shocked By Ballooning CPI

The consumer price index (CPI) came in much hotter than expected. The consensus was for a 0.2% month-to-month increase in price inflation.  The actual number was 0.8%. It was the biggest monthly gain in CPI since 1981. Annualized, CPI measured 4.2% – more than double the mythical Federal Reserve target of 2%.

Federal Reserve Vice Chairman Richard Clarida said, “We were surprised by higher than expected inflation data.”

In his podcast, Peter Schiff said the only reason investors and economists were surprised is because they’re clueless.

Peter said the low expectation didn’t make sense given the price increases we’re seeing in the economy and the trajectory of the CPI over the previous three months. The monthly rises in CPI through the first quarter showed an unmistakable upward trend. The CPI in January was up 0.3%, it was up 0.4% in February and it rose 0.6% in March.

Why would anybody expect the next number in that sequential series of months to collapse down to 0.2, which would have been quite a bit lower than the lowest reading of the year that happened all the way back in January?”

Keep in mind, the CPI isn’t really an honest number and understates inflation.

If you combine the CPI numbers through the first four months of the year, we’re already above a 2% increase with eight months to go. If you extrapolate out the trend, inflation will be at 6% on the year.

This is well above anything the Fed should be able to consider acceptable when they’re claiming with a straight face that their target is for inflation to average 2%.”

Most people don’t think price inflation will continue at this pace through the entire year, but Peter raises a good question: why wouldn’t you think that a trend that’s in motion won’t stay in motion?

You would expect higher than expected inflation to drive the price of gold and silver higher. After all, they are considered inflation hedges. But the exact opposite happened. Both metals sold off. Meanwhile, the dollar gained strength despite the fact that inflation is a measure of the dollar losing purchasing power.

So, why is news that the dollar is losing purchasing power even faster than we thought, why is that bullish for the dollar? Why do people want to buy dollars more as they’re losing value even faster? You would think that the news that inflation is a lot worse than people thought meaning the dollar is losing value faster than we thought it would that it would spark people who are holding on to dollars to want to get rid of them.”

But that’s not how the markets are working.

Some people watching gold and silver get clobbered on news of higher inflation immediately concluded that this proves there is manipulation in the precious metals market. Peter said it’s not manipulation. It’s stupidity.

It’s the stupidity of the traders because they continue to operate under the false premise that these hotter-than-expected inflation numbers are going to cause the Fed to raise rates sooner rather than later. … So, it is the prospect of tighter monetary policy to fight off an incipient inflation problem that is suppressing gold and supporting the dollar.”

Peter said at some point, these traders will figure out what should already be obvious.

The Fed is not going to fight inflation. Because even if it tried, it couldn’t do it, which is why it won’t, which is why I’ve been saying there will be no fight. The Fed is going to surrender. Inflation is going to win by default. And inflation is going to be much worse than markets expect.”

Peter said there is no way the Fed can get in front of 6% CPI. It would have to raise rates to 8% or 10%.

That is impossible, so it’s not going to happen. In fact, the Fed is going to be creating more inflation as inflation numbers get worse because as inflation pushes up the cost of living that’s going to restrain the economy. The economy is going to end up moving into recession because of the increase in inflation, and the Fed is going to ignore the inflation problem as it tries to tackle the problems in the economy and in rising unemployment, which is ultimately going to happen because of increases in inflation because it is going to suppress real consumer spending.”

Peter said any weakness in gold should be bought if that weakness is the result of higher than expected inflation.

Because inflation is good news for gold. The bad news for the economy is the Fed can’t do anything about it. In fact, the Fed is deliberately creating inflation because inflation is the only policy option it thinks is politically viable. So, when traders figure this out, gold is going to be bought on bad inflation numbers, not sold.”

In this podcast, Peter also talks about the whacky labor market.