From Birch Gold Group
In news that isn’t likely to surprise many people at this point, consumer price inflation is accelerating even faster as of March 2022. Prices of “All items” rose 8.5% over last year…
According to a CNBC report that appeared to downplay the “tax that no one votes for,” the increase is the highest since 1981, and there are hints of potential stagflation on the horizon:
Headline CPI in March rose by 8.5% from a year ago, the fastest annual gain since December 1981 and one-tenth of a percentage point above the estimate. Surging food, energy and shelter costs helped account for the gain. Real worker earnings fell by another 0.8% during the month as the cost of living outpaced otherwise strong pay gains. [emphasis added]
At least a few other major media outlets have tried to downplay the inflation increase by presenting the fact that “core” inflation didn’t rise quite as fast as experts forecast. To clarify, the core inflation measurement excludes “volatile food and energy” price surges, because even though we spend about 20% of our paychecks on food and energy, economists think they should be eliminated from inflation calculations to provide a “clearer picture” of long-term inflationary pressures.
Michael Every of Rabobank explained why the core inflation didn’t rise quite as fast as experts predicted, and why (despite that bit of good news) the important prices are still running white-hot:
The market focus was on the 0.3% m/m core print, which was 2 ticks lower than consensus. Along with the recent dip in oil prices, the sudden view was again that we have seen ‘peak inflation’… What the market didn’t notice in the CPI release was the detail that ‘peak inflation’ was driven by a large dip in used car prices (-3.8% m/m) when almost everything else went up.
In other words, prices on this one category of expensive purchase (a used car) went down. However, the critical everyday consumer items like food and gas are still rising in price. Doesn’t seem like anybody, especially the “experts” should be too excited about that.
But of course, even the tiniest hint that the bloated stock price “party” can keep going is welcome news for stock-boosters and their followers. CNBC’s “This is actually great news!” report reflected that line of thinking:
Markets reacted positively to the report as stocks rose and government bond yields declined. “The big news in the March report was that core price pressures finally appear to be moderating,” wrote Andrew Hunter, senior U.S. economist at Capital Economics.
Now, it would be great if prices on those core spending categories were declining. Right? Notice, though, that’s not what happened. Those core prices rose from last month. Here’s a quote from the official Bureau of Labor Statistics report:
The index for all items less food and energy rose 0.3 percent in March following a 0.5-percent increase the prior month.
So why are the stock boosters celebrating? They thought it would be worse.
They’re at the point now that they’re so desperate for good news, they’ll take one fairly insignificant data point from a report most people don’t care about and breathlessly claim “Markets reacted positively!”
Some experts even think the economy might still be on “solid footing” while the average American is spending over $50 for a tank of gas. One Newsmax analyst said, “For now, the economy as a whole remains solid, with unemployment near 50-year lows and job openings near record highs.”
Ah, optimism… Jobs lost through forced business shutdowns and vaccine mandates in response to Covid panic are starting to be filled again, accounting for the “low unemployment.” That seems more like partial economic recovery rather than “solid footing.” The difference between a recovery and actual progress is pretty simple: a recovery means “getting back to where we started from.” Actual economic growth can only really be measured after the recovery is complete.
It’s convenient to forget that, when reality conflicts with your agenda of relentless cheerleading and pollyanna optimism.
So, if you’re with us in a preference for inconvenient facts rather than hopeful opinions, there’s something else you should know…
2 reasons prices will go higher (one might surprise you)
It’s one thing for CPI (consumer price inflation) to be rising at a pace not seen since 1981. But that’s not the whole story.
It’s quite a troubling sign that the PPI (producer price index) is also rising.
The definition of PPI is fairly simple:
The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output.
PPI measures the price “further up the line” at the manufacturer level, well before a product reaches the store shelf. Producer prices are invisible to the average American until cost increases show up on our receipts.
Because PPI measures prices across different types of goods (everything from raw ore and chemicals, to intermediate items like circuit boards and glass), and because manufacturer prices don’t affect our wallets right away, looking at PPI is a good leading indicator of future CPI.
When PPI goes up, CPI tends to follow, and vice versa.
According to the Bureau of Labor and Statistics, the current PPI is still running pretty hot:
On an unadjusted basis, final demand prices moved up 11.2 percent for the 12 months ended in March, the largest increase since 12-month data were first calculated in November 2010.
The producer price index is now at an all-time high.
That’s a bad sign, and it means that rising prices aren’t likely to go away any time soon.And record PPI isn’t the only reason that consumer prices are very likely to keep rising…
Even worse, the second reason inflation is likely to keep rising is a psychological one. It’s called inflationary psychology, and was explained in a recent article:
Inflationary psychology is when:
1. Consumers speed up purchases or seek higher salaries because they believe prices will rise in the future
2. Businesses raise prices in anticipation that costs will go up in the future.
Expectations for high inflation lead to 3 trends:
1. Workers ask for raises to hedge against the rising prices they have experienced.
2. Consumers accelerate purchases of goods to avoid higher prices in the future. Research has shown that households are 8% more likely to buy durable goods (cars, refrigerators, etc.) when they expect a bump in inflation.
3. Businesses increase future prices after forecasting rising costs and robust consumer demand.
That means inflation can keep rising simply based on the perception of consumers thinking higher prices are “on the way,” and businesses anticipating higher costs.
If that is all it takes for inflation to keep running hotter and hotter, then the next few months might be a doozy.
To get an idea of just how it might shape up, we’ll indulge in some number-crunching…
Projecting inflation for Christmas 2022
In order to get some idea of what the rest of the year might look like, we did some economic analysis. Please note our assumptions, which were:
- Inflationary pressures continue as they have over the last seven months
- No new inflationary shocks (another invasion or expansion of the current war, drought, natural disaster) occur
- The Fed’s meager rate hikes will rattle the stock market without measurably impacting inflation
We took the last seven months of inflation data and used them to extrapolate prices for the next eight months. We used three scenarios:
- Best-case scenario, where prices rose by the lowest of the previous 7 month’s rate
- Intermediate scenario, where prices rose by the average of the previous 7 monthly rates
- Worst-case scenario, where inflation continues at the blistering 1.2% monthly pace we saw in May
Even the best-case scenario doesn’t look pretty…
Based on these numbers, it wouldn’t be surprising to see double-digit inflation by Christmas at best. At worst, 18% inflation? That’s the worst the U.S. experienced throughout the 20th century, during the post-World War II boom (which lasted one year).
Thanksgiving 2021 was the most expensive Thanksgiving ever. The way things are shaping up, we’ll look back at 2021 fondly…
Inflation’s warm-up stage is over
We’ve been sounding the alarm about inflation for a while now. For good reason! An entire generation of Americans simply doesn’t know how corrosive inflation can eat away their buying power. And it looks like the situation is still getting worse.
That means you still have time to protect your savings for the incoming onslaught. Already have your inflation-resistant investments in place? That’s great! Now is the time to evaluate your plan against the current conditions to make certain you’re protected even when bad goes to worse.
If your savings aren’t diversified into inflation-resistant investments, well, why wait? Making your retirement more resilient to future inflation can take a huge load off your mind. Consider your risk profile, as well – are you over-exposed to overvalued stocks? Bonds that pay a negative after-inflation yield? It might be worth taking a few minutes to learn how physical gold and silver can help your savings weather not only inflationary spikes, but also stock market collapses. Diversification has major benefits, not the least of which is your peace-of-mind…