Federal Reserve Chairman Jerome Powell keeps telling us not to worry about rising prices, assuring us that any increase in price inflation is “transitory.” It appears most of the mainstream is buying this hook line and sinker.
The March CPI number was expected to come in hot due to a much lower baseline. Prices tanked last March as governments locked down their economies. As a result, economists expected the year-on-year CPI comparison to show a big increase. But the increase was even bigger than expected. Peter Schiff talked about it in a recent podcast.
The CPI rose 0.6% from February and 2.6% from the same period a year ago. Dow Jones estimates were for the index to rise 0.5% month-to-month and 2.5% on a yearly basis.
The markets basically shrugged this off, assured that it’s only transitory.
Peter reminds us that the same people assuring us the inflation is transitory were telling us subprime was contained leading up to the 2008 financial crisis.
“Well, they’re as transitory now as subprime was contained. The problem is the markets are being fooled again just like they were being fooled in the past.”
Peter raises a key question: how do we know rising prices are transitory?
“How are they sure that it is not just the beginning of a protracted period of rising prices?”
The answer to this question is they don’t.
“We’re not going to know whether these gains are transitory until we’re looking back at them through the rearview mirror.”
And that’s basically the Federal Reserve’s strategy. Powell and Company want to wait to see for sure whether or not rising prices are transitory. If they realize they are not, then they will take action to deal with the problem.
“But of course, by then the problem is so out of control that the Fed doesn’t have a prayer of doing anything about it. In fact, I don’t think they can do anything about it right now, which is why they’re not even trying, which is why they’re pretending that it doesn’t exist.”
The monthly rises in CPI through the first quarter show an upward trend. The CPI in January was up 0.3%, it was up 0.4% in February and now it’s up 0.6% in March. That totals a 1.013% increase in Q1 alone. If that trend continues every quarter this year, we’re looking at a better than 4% gain in CPI. That is well ahead of the 2% target. And if you extrapolate the monthly acceleration in the CPI gains, it would come to something like 13% by the end of the year.
Peter said he doesn’t expect the CPI to accelerate at this pace all year, but he does expect the 2021 CPI to come in above 5%. And a 5% increase in CPI means consumers are actually paying a lot more than that.
“For the CPI to reveal 5% you know that the actual rate is probably north of 10%.”
While everybody focused on the CPI number, there was another inflation indicator that didn’t get as much attention. There was a big jump in import and export prices. Import prices surged 1.2% in March and are up 6.9% year-over-year. Export prices jumped 2.1% on the month and 9.1% year-over-year.
Peter pointed out that the spike in export prices reveals a deeper problem.
“If it costs 2.1% more to produce the stuff that we’re exporting, it stands to reason that we also had a pretty big jump in the cost of producing the stuff that we’re not exporting — the stuff that we’re going to keep here. Everything we make is more expensive to make. And it’s going to get passed on to consumers whether they’re international or whether they’re domestic.”
Despite the fact that export prices are rising faster than import costs, the trade deficit is still exploding. That reflects volume. The US imports a lot more products than it exports.
The only thing stopping prices from rising even faster is the fact that the dollar still hasn’t broken down.
“People are still of the belief that the US economy is strong and that the Fed is going to raise rates. They don’t understand that the US economy is weak, which is why rates are at zero, and why they won’t raise rates.”
The mainstream also believes the economic recovery is moving along nicely and the Fed is going to tighten monetary policy sooner than expected.
“We don’t have a strong recovery. We have a bubble. What is causing the bubble? Inflation! The Fed is printing money, and we’re taking that money and we’re buying stuff. That is not a strong economy. A strong economy produces surpluses. You produce more stuff you can export.”
The soaring federal government budget deficit is another sign of a weak economy. Strong economies flood the Treasury with cash. Corporations and individuals are producing more and paying more taxes. On the other side of the equation, the government doesn’t have to spend billions on unemployment benefits and stimulus plans when the economy is strong. The fact that government spending is soaring and tax revenues are not is an indication of a weak economy.
“The Fed can’t raise interest rates without pricking the bubble. The economy isn’t really strong. Inflation is creating the illusion of strength, and raising interest rates would prick that bubble and pierce the illusion. So the Fed can’t raise rates the way the market expects because they’ve confused inflation with a legitimate recovery. If the Fed tries to fight inflation by raising rates, the whole recovery vanishes and we’re back in recession or depression, and the financial markets come toppling down.”
This is precisely why gold hasn’t gotten a big boost by these hotter-than-expected inflation numbers.
“Everybody thinks that inflation is contained, and they do expect the Fed to eventually launch a winning war with inflation with rate hikes, and all that is pressuring gold. But again, the markets are wrong twice. There is going to be no war because the Fed can’t wage it. But even if it tried it would lose.”
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