Peter Schiff: Inflation Is Going to Be a Huge Problem

The consumer price index fell 0.8% in April, according to the latest Labor Department data. It was the biggest plunge in consumer prices since December 2008. year-over-year, the CPI is up 0.3.

By all indications, it appears inflation is the least of our problems despite massive Federal Reserve money-printing and unprecedented government spending. But in his podcast, Peter Schiff said you need to ignore the CPI because despite what it might indicate, inflation is a huge problem.

Peter started by pointing out that a slower rise in prices isn’t a bad thing – at least not if you’re a consumer.

The only thing better is when prices fall, or don’t rise at all. Rising prices are only good if you’re a government economist or a central banker and you’re trying to convince everybody inflation is great and that we need inflation to survive and that somehow if it’s not high enough, it’s an emergency and the Fed needs to pull out all the stops.”

Breaking down the CPI, it fell 0.4% in April excluding the volatile food and energy components. Core CPI dipped 0.1% last month, marking the first drop since January 2010.

The steep drop in the cost of gasoline with the collapse of oil prices was a big factor in the overall drop in CPI. Food prices actually nudged upward. Of course, Americans couldn’t really take advantage of the drop in fuel costs. With shelter-in-place orders across the country, they weren’t driving.

Other prices collapsed dragging CPI down with them. For instance, the cost of airline tickets plunged as passenger numbers plummeted by more than 95%.

If you listened to the mainstream coverage of the CPI numbers, you’d probably think it was a dire emergency. The term “deflation” was bandied about and some pundits suggested the Federal Reserve needs to act to “support prices.” Peter asked a pretty poignant question: why would we want the Fed to do something about a good thing?

If the cost of living is going down, I don’t need to be saved from that. I don’t need the Fed to protect me from a lower cost of living. I want a lower cost of living. The less things cost, the more I can buy.”

Falling prices also benefit businesses because their costs fall. One person’s price is another person’s cost. On the other side of the economic equation, falling prices increase demand. Companies can often make more money in a low price environment than with higher prices thanks to sales volume. Inflation promoters claim otherwise, but tell that to cell phone manufacturers. They’ve made money hand-over-fist as the price of the technology has dropped over the years.

Regardless, the media will jump on the CPI number and insist the Federal Reserve can keep printing money and the government can continue its stimulus programs without any worry over inflation. In fact, we’re told we might even need more stimulus to boost inflation.

Peter begs to differ. In fact, he thinks inflation will rise much faster than people think and much sooner.

In the early stages of the crisis, demand plummeted and there was still supply, so prices went down. But as markets adjust and businesses reduce production, we will have fewer goods and services in the market. Eventually, a supply glut turns into a supply shortage. Meanwhile, some of the demand will come back.

Prices are going to be moving up rather dramatically when we work through the inventory overhang and businesses have a chance to shut down some capacity and reduce and get prepared for less demand.”

We’re already seeing an adjustment in supply – some intentional and some a result of government coronavirus rules. Restaurants that can open have to operate at 50% capacity, but their overhead remains roughly the same. That means they’ll have to charge more. Airlines have drastically cut capacity. That means higher ticket prices.

As far as the broader economy, Peter expects a rebound as thigs open up but thinks that will roll over again as the economic realities and long term damage from the shutdown become more apparent.

The only thing we’re going to recover to potentially is a normal recession. Even if we have big growth, we’re still going to be below where we started. So, we’re not going to get out of recession. It may look like we’re out of depression until we’re right back in there.”

Peter went on to talk about the impact of all of the government stimulus on the economy. In a nutshell, the more the government spends, the more it burdens the economy.