The October CPI came in lower than expected, sparking a rally in stocks, bonds, and gold. Cooling prices reinforced the belief that the Federal Reserve won the inflation fight and the rate hiking cycle is over. In his podcast, Peter Schiff explained why the demise of inflation is greatly exaggerated.

The consensus was for a 0.1% increase in prices last month. The actual number was flat at zero. Peter wasn’t impressed.

“It’s one month. Who cares? And it’s a government index, so it’s meaningless anyway.”

The annual rise in CPI was 3.1%, slightly below the 3.2% projection. Core inflation also came in just a tick below expectations. Peter reiterated that this hardly seems like a cause for celebration. Nevertheless, Wall Street reacted with glee, sparking an immediate rally.

As a result of these numbers, which were almost exactly what everybody thought they were going to be, the expectations for a rate hike have plunged. And the expectations for 2024 rate cuts have moved up quite a bit. So, as a result of this supposedly great news on inflation, the markets believe the Fed is pretty much done, that the war on inflation has been won, the Fed has been victorious, and now it can start taking its troops off the battlefield by cutting rates.”

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Peter said the markets are “completely wrong.” He noted that core CPI remains double the Fed target of 2%, and he said there is nothing indicating we’re heading toward two.

Just because we’re at four now doesn’t mean we’re going to two. We could just as easily double and go back up to eight. There’s no reason to just conclude that that’s where we’re headed. But even at four, we’re still way above the Fed’s target of 2%.”

It’s important to remember that even if prices are rising more slowly, they continue to rise.

If Americans can’t afford to buy stuff at the current price, well, it’s even less affordable when the current price goes up. Prices have gone up dramatically over the last two or three years. Real relief would require prices to come down so that some of these gains are reversed.”

Peter emphasized that the CPI data doesn’t prove the Fed is winning anything. He said we’re really just in the process of bottoming.

This is trough inflation. These numbers are banging around the bottom and we’re getting ready to start to move higher. And so we’re going to start to move further and further away from the Fed’s 2% target, not closer to it.”

Peter reiterated that the data does not mean the Federal Reserve is winning the war on inflation.

That is a war it cannot win.”

The big drop in the dollar after the CPI data came out is one of the reasons. Why did the dollar drop? Because the markets believe the Fed will relent on interest rate hikes and pivot to cuts.

The paradox is they wanted dollars when inflation was a problem and the Fed was fighting it. That’s when they should have wanted to get rid of dollars. Because, by definition, inflation means the dollar is losing its purchasing power. So, why would you want to buy something that’s losing its purchasing power? That is the irony of the foreign exchange market. That’s how they work now. It doesn’t matter about the dollar’s purchasing power. What matters is the direction of interest rates.”

The strength of the dollar helped do the Fed’s work. As the dollar rose, commodity prices dropped, driving the CPI lower.

The gains that have been made with respect to measuring inflation have been because of the strong dollar. But here’s the problem; the minute the Fed claims victory, or even the markets think that the Fed is winning, even before the Fed actually declares ‘mission accomplished,’ the markets start trading down the dollar. The dollar starts to fall. As long as the markets think the Fed is winning, the dollar will keep falling. It was when they thought the Fed was losing that they wanted to buy dollars because that meant the Fed was going to fight harder and have to raise rates. But if the fight is over and the Fed has won, well, then there are no more rate hikes.”

If the Fed confirmed market sentiment and publicly declared victory, the dollar would fall through the floor. That would send commodity prices much higher, pressuring CPI higher.

The minute the Fed is winning, they lose. … There is no way to win this war because the minute they stop fighting, inflation strengthens. So, in order to keep the inflation forces at bay, if they can, they can never let up. They have to keep on hiking rates.”

Peter said the markets also fail to grasp the fact that up until the last 18 months, the Federal Reserve aggressively created inflation for more than a decade with artificially low interest rates and quantitative easing. That was the central bank’s policy goal.

When you spend 15 years creating inflation, you don’t erase that inflation with one year’s worth of rate hikes. It doesn’t matter that we went from zero to 5%. Five percent is still not that high of a rate. But you’ve got to look at all the money, the money supply, all of the liquidity that has been pumped into the economy during that time period. Barely any of it has been withdrawn.”

The Fed’s balance sheet remains close to $8 trillion. That’s 10 times larger than it was in 2008.

Prices haven’t even caught up yet. We still have a long way to go on the upside for consumer prices to catch up to the inflation, even if they’ve taken away a little bit of the inflation that they’ve created.”

The markets seem to think the Fed can turn off the money creation like a faucet and price inflation will just disappear. But they don’t understand where price inflation came from, and they don’t recognize the lag.

Peter went on to explain that contrary to conventional wisdom, a weakening economy will not tame price inflation. Remember, inflation is caused by too much money chasing too few goods – not economic strength. A recession will lower production, but consumption typically remains supported by government handouts and fiscal stimulus. Meanwhile, the central bank pours even more money into the economy through rate cuts and QE.

On top of that, a deep recession will cause the already massive budget deficits to grow even larger. That will create additional inflationary pressure.

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