Peter Schiff: Too Much Money; Not Enough Stuff

For the first time in nine months, the government CPI data came in under expectations. Prices rose by 0.3% last month, just below the 0.4% projection. Year on year, the CPI was up 5.3%. Core inflation, stripping out more volatile food and energy (for those of you who don’t eat or use energy) was up 0.1%. Core inflation is up 4% on the year.

In his podcast, Peter Schiff took a deeper dive into the numbers and explained why this doesn’t prove inflation is “transitory.” He also drilled down to the root cause of rising prices – too much money chasing not enough stuff. Given the current monetary policy, that doesn’t appear set to change anytime soon.

Focusing on the headline number of 0.3%, a lot of people were relieved because we finally got a cooler than expected inflation read. In the minds of many, it also validated the Federal Reserve’s narrative that inflation is “transitory.” But as Peter put it, “One month does not transitory make.”

First of all, 0.3% in one month, in-and-of-itself, is still a lot of pricing pressure. Because if you annualize 0.3, well, that’s almost 4% per year. So, if we got this ‘good number’ 12 months in a row, that’s a 4% gain in consumer prices, which is almost double what the Fed claims it wants, which is a rate slightly above 2%. Well, 4% isn’t slightly above 2%. It’s almost double 2%. So, this is not a great number in-and-of-itself.”

You also have to put the August number in context. If you annualize the year-to-date increase in the first 8 months of 2021, the CPI would come in at 6.3%. That’s more than triple the Fed target.

I don’t see how getting a slight amount of relief in that the number wasn’t as bad as it could have been for one lone month — I would not get excited and prematurely write an obituary for inflation.”

Peter noted that the CPI drastically understates rental costs. The increase in “owner’s equivalent rent” was just 0.2%, and yet private sector reports show double-digit increases in rents across the country in 2021. Meanwhile, home prices are up some 20%.

For the government to claim housing costs are only up 2 or 3% year-over-year – that is ridiculous. And it is artificially suppressing the CPI rate because that is such a big component. Shelter is a third of the index. And that third, that number, is much lower than it should be if we actually plugged in real home prices or actual rents that people are really paying. Not the rents that the government is pretending people are paying.”

Peter reiterated that the CPI numbers are inherently dishonest and understate rising prices.

Looking at the broader inflation picture, CPI continues to run behind producer prices. Annualized PPI is up 10.5% on the year, a full 4% ahead of CPI. Peter said the big divergence between CPI and PPI doesn’t bode well for the consumer.

The question is how much longer are companies going to eat these diminishing margins?”

Also, keep in mind, the Fed has effectively changed the meaning of “transitory.” It doesn’t mean temporary. The Fed simply means the CPI rate is transitory.

The price increases are permanent.”

The mainstream continues to blame rising prices on supply chain issues. There are shortages everywhere. As Peter noted, the fact that there seem to be shortages in all sectors of the economy should tell people there is something else going on here.

How can everything be in short supply? And the truth of the matter is it’s really a surplus of money that is the problem, not so much a shortage of stuff. Because there’s always a shortage of stuff when you print too much money.”

In a normal economy, demand flows from supply. People work and add goods and services to the economy. When they get paid for their work, they can then buy stuff from the bag of goods and services to which they contributed. Over the last 18 months, a lot of people weren’t working. They didn’t contribute anything to the bag of goods and services. But the government printed a whole bunch of money and handed it out, allowing these same people to continue grabbing stuff out of the bag.

Obviously, there’s not going to be enough stuff in that bag, especially when you have millions of hands that put nothing into the bag reaching in to grab something. And so the only thing that can happen is that prices go up. That’s how the market adjusts when you have all this new demand but no increase in supply. You have to ration the supply with a higher price. If everybody who was buying stuff was also producing stuff, that wouldn’t be a problem.”

As Milton Friedman once said, “Inflation is always and everywhere a monetary phenomenon.” An increasing money supply means more dollars chasing roughly the same amount of stuff. As a result, prices rise. As economist Daniel Lacalle put it, “More supply of money directed towards scarce assets, be it real estate or raw materials. The purchasing power of money goes down.”

You’re never going to have an unlimited supply of stuff.

That’s why the emphasis on growing an economy has to be on increasing production. By capital investment and savings under consumption, you can have more stuff. You can’t just focus on demand. You can’t just print money and give it to people and then be surprised when there’s nothing to buy — because they didn’t make anything. If it was that easy, if all you had to do was print money, then Zimbabwe would have been a smashing success story.”

And yet we have a record increase in money supply and nobody wants to even consider that it might be contributing to rising prices.

How you can write about a huge inflation problem and completely overlook the elephant in the living room meaning all the inflation, all the money supply that’s being printed? Obviously, you’re not going to put your finger on the real cause.”

In this podcast, Peter also talks about rising inflation expectations among consumers, gold stocks marking a potential turning point, inflation’s role in driving government spending (at the expense of the middle class) and hedge funds buying preferential tax treatment from politicians.