Peter Schiff: The Fed Will Never Hit Its Inflation Target

The Consumer Price Index (CPI) data for July came out last week. Even though the headline number ticked up slightly compared to June, most mainstream analysts took it as a sign that the Federal Reserve made more progress in its inflation fight. In fact, most mainstream pundits seem convinced that the Fed is on the verge of winning that fight and pushing CPI back to its 2% target. In his podcast, Peter said they are wrong.

Investors much-anticipated the July CPI report – not so much because they are worried about inflation, but because they are worried about high interest rates.

A lot of these guys are highly leveraged and they’ve been gorging on a banquet of cheap money for more than a decade. The reason that everybody is waiting for inflation to go back down to the Holy Grail of 2% is so interest rates can go back down. That’s what they’re concerned about, not the price of milk or the price of gas. The price of money, credit, that’s what everybody is concerned about.”

Because the central bank kept interest rates artificially low for so long, everybody was incentivized to pile on a bunch of debt. Now, the debt chickens are coming home to roost.

Everybody just acted as if rates would never go up. Of course, that was foolish because it was inevitable that they would eventually go up. But no one cared. Everybody just wanted to party and dance while the music was playing. They didn’t care that it was eventually going to stop.”

Peter said that now everybody is waiting for lower interest rates, and they’re not going to get them.

Inflation is not going to back down to 2%. It’s just not going to happen.”

In fact, the CPI should never have been at 2% given all of the inflation created by the government and the Federal Reserve.

Remember, the CPI is measuring inflation. It’s not inflation. Inflation is not prices going up. It’s not wages going up. It’s not costs going up. No, it’s money supply going up.”

Although it is contracting slightly now, the money supply rose at a record pace during the pandemic stimulus years. That was on top of a massive increase in the money supply after the Great Recession.

You’re not going to get rid of all that inflation just by taking rates from zero to five-and-a-quarter, five-and-a-half, whatever, and leaving them there for a year or so. That’s not going to do it. That’s not going to reverse better than a decade of inflation creation, especially when … you have [federal government] budget deficits exploding even before we’re officially in a recession.

Peter said inflation is going to get much worse.

He pointed out that a lot of people don’t seem to realize that rising interest rates are a price hike.

The interest rate is the price of money. It’s a price. It’s gone up. That is going to factor into the price of everything. I think a lot of other products and services have a long way to go as far as hikes in order to make up for that.”

Interest rates are part of the cost structure. Consider rising wages. They get passed on to consumers. But it’s not that rising wages are causing prices to go up. Inflation – money creation – causes both wages and prices to go up. But sometimes there is a sequence. You get inflation. That causes food prices to go up. Rents go up, so workers need more money. Now their employers have to charge more for their products.

But what gets the ball rolling is the money printing, the expansion of the money supply. So, all these guys who talk about a wage-price spiral, they’re wrong. It’s a false thing concocted by the government to try to blame the private sector for inflation. The same thing as cost-push inflation. People say, ‘Well, prices go up because costs go up.’ But that’s circular logic because ‘costs’ are just another word for prices. One person’s cost is another person’s price.”

Peter said nothing that the Federal Reserve has done so far will succeed in bringing inflation back down to 2%.

The central bank has managed to bring the headline CPI number from 9% down to just over 3%. A big drop in oil prices and a strong dollar helped bring that number down. But Peter said that’s just transitory. Meanwhile, the core inflation number remains close to five percent. It has come down very little.

The Fed’s got interest rates above 5%. They’ve shot all their big guns, basically. There’s not much left in the barrel — maybe another hike or two. It’s like Superman is there, and you empty your revolver and all the bullets bounce off his chest, and it’s like, well, now what am I going to do?”

The problem is if the Fed really gets really tough on inflation and moves interest rates up where they need them to be, everything collapses.

In this podcast, Peter also breaks down the latest CPI data, market reaction to the report, some other economic data, and AOC complaining about the FDA regulation on sunscreen.