Buckle up. Prices are going up, up, and away.
As I predicted, the Consumer Price Index increased far more than economists had anticipated, with prices that consumers pay jumping by a massive 4.2%.
Mark my words: this is just the start of inflation. The American consumer has not yet even felt the full effect of this spectacular rise in commodity prices because inflation takes time to trickle down to retail prices.
And, when it does, it won’t be pretty.
The U.S. Bureau of Labor Statistics reported on Wednesday that the all items index increased 4.2% over the last 12 months, the largest increase since 2008. Economists expected CPI to spike 3.6%, which still would have been the largest spike in the last 10 years.
The numbers were primarily driven by energy costs, which increased by 25.1%. The cost of gasoline increased 49.6% from a year ago, while natural gas increased 12.1%. The prices of used cars and trucks increased by 21.0%.
The CPI in food items increased by 2.4%, while the index on all items except food and energy increased by 3%.
Meanwhile, the CPI is not the only inflation measurement that worries the investors.
On Tuesday, inflation expectations rose to the highest levels since 2006. The five-year breakeven rate, a key indicator of inflation expectations, climbed to 2.73%. Breakeven rate is the yield gap between inflation-linked debt and Treasury Inflation-Protected Securities, which allows investors to “bet” on inflation data.
This 5-year inflation expectation chart clearly shows that markets do not buy the Fed’s rosy outlook on inflation. Though the Fed continues to maintain that high inflation will be “transitory” but, investors know better.
And no wonder. Copper and iron are still trading at record highs, while lumber costs have 300% in the past year. The global economy is experiencing shortages in goods as varied as chicken and microchips. And the inflated prices of raw materials is beginning to trickle down.
And, yet…. and yet: the Fed is still pretending that inflation doesn’t exist. So, I would expect continued money printing and therefore, more inflation in the summer months.
Chinese Factory-Gate Prices Spike
Tuesday’s data also showed that factory-gate prices in China rose 6.8% in April, faster than expected. As producers were bidding up prices of raw materials, to keep up with easy money and stimulus-fuelled demand, the spike of factory prices is the next logical step.
This proves that inflation is rapidly making its way to the consumer. Factory prices are bound to impact retail, and that’s when most Americans will start feeling the results of the Fed’s zero-percent interest rates.
Oil at $3 a gallon
Retail prices of oil will have an even more immediate effect on U.S. consumers. Oil is critical for the functioning of the economy, and it affects virtually all prices of consumer goods.
After the attack on the Colonial Pipeline and the ensuing panic, retailers hiked oil prices above $3 a gallon. Retail prices of oil will drop back to where they were before the ransomware attack, as retailers were likely looking for an excuse to hike prices anyway.
Rate Hikes Not As Likely As Some Think
Does this mean that the Fed will slam the breaks on inflation? It’s not clear that they will. The stock market is heavily dependent on zero-percent interest rates, and even a hint at a rate hike is making investors nervous.
Tech stocks stand to lose the most, as they were the primary beneficiaries of lower interest rates. The valuation of tech stocks is heavily dependent on rising future earnings, which are much more appealing to investors at lower interest rates.
These stocks also benefited from the fact that the lockdown favored the business models of their companies. But a rate hike could wipe these pandemic gains.
Will the Fed risk another recession, or will they respond with even more easy money? If past behavior is any indication, we can expect more easy money. Check out today’s show which details the mass risks to the economy from higher and higher inflation.