Producer Prices Undercut Transitory Inflation Narrative

While the CPI numbers came in around expectations in July, the producer price data came in hotter than expected for the seventh straight month, putting a damper on the notion that “transitory” inflation might be cooling.

PPI was up 1% in June. The projections for July were for a 0.6% increase — still a big number, but cooling somewhat. Instead, the July PPI was once again up 1%. It not only exceeded expectations, but it exceeded the upper bound of expectations. Year over year, the expectation was for a 7.3% increase. Instead, it charted as a 7.8% increase.

For the year, producer prices are up 6.4%. Annualizing the numbers gives a projected 11% gain in PPI on the year.

The PPI has already charted a record increase. Peter read the list of monthly increases on the year – 1.3% in January, 0.7% in February, 0.8% in March, 0.7% in April, 0.8% in May, 1% in June, and 1% in July.

Does anything about that string of numbers suggest ‘transitory?’ Does anything suggest that the trend is reversing and that we’re seeing a reduction in the rate of increase of producer prices? Not at all.”

Peter then asks a poignant question — what does this portend for consumer prices? So far, the CPI has lagged the PPI. Many producers have dragged their feet when it comes to passing on their higher costs to their customers. They’ve bought into the transitory inflation narrative and believed if they could just hold out, their costs would come back down. But it’s becoming increasingly clear that these price increases are forever. Peter said as the transitory inflation narrative unwinds, more and more producers will throw in the towel and raise prices.

And if companies don’t eventually pass on their rising costs, it will crush corporate earnings.

Meanwhile, the stock market is basically ignoring this data and surging to new highs.

If the rising costs ultimately are passed on, which I believe they will, well then that is going to mean consumer prices are going to be rising much faster, which will accelerate, in theory anyway, the Fed’s tightening cycle. So, however you want to look at increases in producer prices, if they don’t pass them on to consumers, it’s bearish for stocks because margins go down and earnings go down. If they do pass on the increases, it should also be bearish for stocks because that means higher inflation at the consumer level, which means the Fed is going to be tightening more, which is also going to be bearish for stocks. So, either way, it’s bearish for stocks. Yet stocks don’t care, and they go up anyway.”

Peter said he thinks it’s possible that unlike currency traders and gold traders, stock traders understand the Fed won’t take away the punch bowl.

The only number that really matters is the number of dollars the Fed is going to continue to print, which is probably infinite. So, people know the Fed is not going to let the market go down. It’s not really going to fight inflation. And so stock market investors don’t want to get off this wave. They’ve been riding a wave of cheap money for so long, they’re having so much fun that they couldn’t even conceive of the ride coming to an end. So, they are ignoring all of this hotter than expected inflation news.”

There was other bad inflation news late last week after the CPI data came out. The National Association of Home Builders confirmed US home prices are rising at their fastest pace in history. Year-over-year, the price of a single-family home is up 22.9%.  We didn’t even see an increase like that during the housing bubble.

Even with mortgage rates at rock bottom – thanks to Fed monetary policy – housing affordability is at an all-time low. And the price of an existing home is as close to the price of a new home as it’s ever been.

With housing prices soaring, rents are also spiking. We have double-digit year-over-year rent increases. Yet when calculating the CPI, the government claims rents are only up 2.5%. This is thanks to a CPI calculation called “owner’s equivalent rent,” basically a made-up number that understates the actual cost of renting a home.

It’s just another way that the government rigs the CPI so that we don’t actually see just how bad inflation actually is.”

Import prices came in below expectations, up just 0.3% month-on-month. Year on year, import prices are up 10.2%. As Peter pointed out, this is an honest inflation number because it simply reports price increases. The government doesn’t run them through some kind of formula. That means import prices are signaling double-digit inflation.

That is an honest number because they’re just taking the prices and seeing how much higher they are. They’re not adjusting them. They’re not using substitution, or hedonics, or stuff like that. … These numbers are a much better indicator of what’s happening to prices than what the government is pretending is happening to prices when you look at the official measures like the consumer price index.”

In this podcast, Peter goes on to talk about the myth of imminent Fed tightening, consumer sentiment, the Fed’s catch-22 and the anniversary of Richard Nixon cutting the last ties to the gold standard.