The Transitory Inflation Ruse

The markets were looking for signs that the transitory inflation period was coming to an end. They didn’t get it when the June CPI number came in much hotter than expected. In his podcast, Peter Schiff talked about the latest price data and said it reveals the dirty little secret – all of this talk about transitory inflation is a ruse. Even worse,  despite what the markets seem to think, there’s nothing the Federal Reserve can do about it.

The producer price index (PPI) numbers that came out Wednesday didn’t do anything to ease inflation concerns. Producer prices charted the largest gain in over 10 years. Year on year, the PPI surged 7.3%. That was the biggest year-on-year rise since November 2010 and followed a 6.6% advance in May. Month on month, PPI was up a full 1% against expectations of a 0.6% gain.

Peter said there is no end in sight and no signs that the rising prices we’re seeing are about to stop.

You have to really go back to the 1970s to see this type of inflation data.”

And it’s difficult to even make a comparison to the 70s given the dramatic changes in how the government calculates CPI.

Peter said it’s possible we could see 10% inflation by the time we get to the end of the year because he anticipates even more price increases as the year goes on. Some companies have likely held off raising prices. The 1.8% gap between producer prices and consumer prices reveals this. But once companies realize this isn’t a transitory phase, they’ll throw in the towel and hike prices.

It is certainly possible that we can finish 2021 with 10% CPI, which would rank it as bad as any of the years that we had during the 1970s. Except 10% in 2021 is not 10% in 1971 or 1979 because this is not your grandfather’s CPI. This is a completely different CPI that is completely rigged and reverse engineered. If we actually have 10% inflation, if we measured prices the way we did back in the 1970s, it’d probably be 15 or maybe 20% inflation.”

The bottom line is that we are currently enduring a rising cost of living comparable to what we experienced in the 1970s with the potential for it to get much worse.

The underlying fundamentals are much worse today than they were back then. And the ability of the Federal Reserve to do something about inflation is substantially reduced from the position that we were in back in the days of Paul Volker and Ronald Reagan.”

That’s the thing the markets don’t seem to get.

If the dollar is losing value, the logical reaction would be to sell dollars. But the dollar index charted its best daily gain in more than a month after the CPI data came out. And you would expect gold to go up. But it fell initially on the CPI data. On the news of higher-than-expected inflation, investors sold an inflation hedge (gold) and bought dollars.

Because everybody believes the Fed is honest in their view that inflation is transitory, to the extent that there is evidence that suggests that it’s not transitory, the markets expect the Fed to change its policy and to adopt a tighter monetary policy in response to this unexpected pickup in inflation, some evidence that maybe it’s not transitory, and so the Fed is then going to raise rates sooner than the markets expect. It’s going to taper its asset purchase program sooner than the markets expect. So, this corresponds to tighter monetary policy.”

Tighter monetary policy signals to currency traders “buy the dollar.” Similarly, tighter monetary policy is generally considered a negative for gold. But Peter said people aren’t looking at the big picture and considering whether it’s possible for the Fed to tighten monetary policy.

It is not. That is why I’ve said the Federal Reserve does not think inflation is actually transitory. I think it knows that it’s not transitory. It just knows not to admit that because it also knows that it can’t do anything about it.”

If the Fed could actually do something about inflation, it would have already done it.

If they could have nipped it in the bud, they would have done it. The reason they haven’t done it is because they can’t. And because they can’t fight inflation, that’s why they have to pretend that it’s transitory. Because if they could fight it, now is the time to do it. Don’t wait for it to get bigger. Don’t wait for inflation to get stronger to try to take it on. You want to nip it in the bud while it’s still a little baby.”

Where will inflation actually be by the time the Fed caves and admits that it isn’t transitory? That’s a frightening scenario to ponder. With rates at zero and inflation at 10%, real interest rates would be at -10%. A 1% hike in the interest rate would only bring real rates to -9%. Is that going to tame inflation? You’d need to bring rates to 11 or 12% to get real rates positive.

There is no way the Fed can get anywhere near there given the level of debt, given the short-term nature of all the debt. … So, the Fed is all bark and no bite when it comes to inflation.”

Reprinted with permission from

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