Producer price index (PPI) data released Wednesday did not help ease fears of inflation – the largest rise in more than a decade. In annual terms, the index rose by 7.3%. On a monthly basis, the PPI added 1% versus an expected 0.6%.
According to Peter Schiff, there is no end in sight to this growth and there are no signs that it is about to stop.
Such data on inflation were last observed in the distant 1970s.
And it’s hard to even compare with the 70s, given the dramatic changes in how the government calculates the CPI.
Peter Schiff said that perhaps we will see 10% inflation by the end of the year, because the expert expects prices to rise even more during the year. Some companies have probably refrained from raising prices. This is evidenced by the 1.8% difference between producer and consumer prices. But once companies realize this is not a temporary phase, they will give up and pick them up.
Of course, we could well end 2021 with 10% CPI, which would put it in the same position as any other year in the 1970s. Except that 10% in 2021 is not 10% in 1971 or 1979. This is a completely different CPI, completely designed and engineered. If we do have 10% inflation, if we measure prices as they did in the 1970s, we will probably get 15% or maybe 20%.
The bottom line is that we are currently experiencing a rise in the cost of living comparable to what we experienced in the 1970s, with the potential for further deterioration.
Key fundamentals are much worse today than they were back then. And the ability of the Federal Reserve System to do something about inflation is significantly reduced compared to the situation in which we were in the days of Paul Volcker and Ronald Reagan.
This is what the markets don’t seem to understand.
If the dollar depreciates, the logical reaction would be to sell them. But the dollar index posted the best daily gains in more than a month since the release of CPI data. And one would expect gold to rise in price. But initially it fell after the data was published. Upon learning of higher than expected inflation, investors sold the inflation hedge (gold) and bought dollars.
Since the markets are confident that the Fed cannot be wrong about the temporary nature of inflation, they also have no doubts about the timely response of the regulator to this unexpected rise in inflation. Many expect the Fed to tighten its monetary policy by raising rates and cutting back on asset purchases.
The tightening of monetary policy is signaling currency traders to “buy the dollar”. Likewise, a tightening of monetary policy is generally considered negative for gold. But Peter Schiff said people are not looking at the big picture or considering tightening the Fed’s monetary policy.
This is why I said that the Federal Reserve does not think inflation is actually temporary. I think she knows that it is not. But the Fed also understands that it cannot be admitted because it knows that it is powerless.
If the Fed could really do something about inflation, it would have done it already.
If they could nip it in the bud, they would. The reason they didn’t do it is because they can’t. And since they can’t fight inflation, that’s why they have to pretend it’s temporary.
Where will inflation actually be by the time the Fed gives up and admits it is not temporary? This is a daunting scenario to consider. At zero rates and 10% inflation, real interest rates would be -10%. A 1% increase in interest rates would only reduce real rates to -9%. Will it help curb inflation? It will be necessary to bring the rates up to 11 or 12% for the real rates to become positive.
The Fed cannot come close to these indicators, given the level of debt and its short-term nature. The Fed barks but doesn’t bite when it comes to inflation.