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The July Consumer Price Index (CPI) data came out this week. For the first time, the numbers were in line with expectations, leading many mainstream pundits to declare “transitory” inflation is already starting to cool down.
Peter Schiff broke down the report in his podcast. He said inflation is far from cooling off. In fact, when it comes to rising prices, you haven’t seen anything yet.
July CPI rose 0.5% month-on-month. This was in line with expectations for the first time this year. Every other CPI report had come in hotter than expected.
The year-on-year CPI came in at 5.4% – a high number, but in line with expectations. Core CPI, stripping out more volatile food and energy, charted below estimates at 0.3%.
Adding up the monthly CPI increases gives us a 4.1% inflation rate through the first seven months of 2021. As Peter pointed out, that’s more than double the Fed’s target of “slightly above 2%,” and we’re barely over halfway through the year. If you annualized the first seven months, you get around 7.2% inflation for 2021.
“Clearly, nobody can define that as ‘slightly above.’ It’s more than triple 2%. I mean, it’s getting close to quadruple.”
And as Peter points out, it would be a lot worse if we had an honest measure of price increases.
“I think if we measured inflation today using the same CPI we used to measure inflation in the 1970s, this year could end up being a worse year than any single year during the 1970s.”
More disturbing, Peter said this is just the beginning.
“This is just getting started. So, when you compare the inflation rate that we’re getting now, at the beginning of the cycle, to the inflation rates we got back in the 70s at the end of the cycle, you can only imagine how much worse it’s going to get when this cycle eventually tops out.”
Peter also noted the Fed has changed the definition of “transitory.” It now only applies to the rate of inflation, not actual prices. The central bankers now concede these price increases are forever.
“The increase in the cost of living is not transitory. It’s permanent. And the hope is, by the Fed, that after we get a big increase in our cost of living, the cost of living will continue to go up from that elevated level, but at the same rate that it was before we had this transitory period of high inflation. Which to me completely destroys any credibility the Fed has in claiming that they’ve successfully contained inflation at 2%.”
Every time we got hotter than expected CPI numbers this year, gold sold off with the expectation that the Fed would respond by tightening monetary policy sooner than originally expected. When the July numbers came out and they weren’t worse than expected, gold rallied. Why are we having this counterintuitive reaction? As an inflation hedge, why do we see gold doing worse when there’s more inflation to hedge? Peter said it comes down to expectations.
“Everybody still believes the Fed, at least all of the mainstream investors that control the lion’s share of the investible money. They believe the Fed, and they’re not worried about inflation, even though it’s here. What they’re worried about is the Fed having to fight inflation. In fact, they’re confident that the Fed is going to fight inflation. They believe that they will battle inflation by tapering their asset purchases and eventually ending the asset purchases altogether, and by normalizing interest rates – raising rates from zero. And so, since the Fed is going to fight inflation, investors don’t want to fight the Fed. That is an age-old Wall Street adage. ‘Don’t fight the Fed.’ And if the Fed is going to be fighting inflation, well, you don’t want to own gold, because in that environment, where you have the Fed tightening policy, everybody believes that environment is bad for gold, and that’s why the price of gold has been weak.”
Peter said investors are wrong. Not only is the price of gold not going to go down in the future; it’s going to go up.
“The Fed is not going to fight inflation at all. It’s probably going to surrender and inflation will win by default. But even if it tries to fight inflation, it will lose and inflation will win. And it is a fantastic environment for gold.”
Many people in the mainstream seemed relieved inflation didn’t come in hotter than expected and some even claimed this shows inflation is cooling, taking some of the pressure off the Fed to tighten monetary policy. Peter said it’s important to realize the numbers ultimately don’t matter.
“The Fed can’t tighten. The Fed has got itself into a box. If the Fed could tighten, it would have done it already. If the Fed could fight inflation, it would already be in the battle. The fact that it’s not fighting it now, the fact that it’s taking a chance and hoping the problem is solved on its own shows you that they have absolutely no ability to fight inflation. They’re saying they don’t want to fight it because they don’t want to risk hurting the economy. Well hell, if they think it would hurt the economy to fight inflation now how much more pain will it inflict upon the economy if they have to fight an even bigger inflation monster later? So, it makes no sense that they would make such a risky bet unless they thought they had no alternative because they can’t fight inflation now either because it’s already too big to be fought. So, all they can do is pretend and hope they can somehow delay the inevitable simply with their words.”
Meanwhile, the Senate passed a $1.2 trillion infrastructure plan that will add more fiscal stimulus to the mix. Some argue with the government stimulus in play, the Fed can take a back seat. Peter said it’s the exact opposite. We’ll need the monetary stimulus more than ever.
“How else is this fiscal stimulus going to be paid for? Where is the Treasury going to get the money for the $1.2 trillion infrastructure package? Where’s it going to get the even greater amount of money for the $3.5 trillion spending bill that’s supposed to follow? The answer is from the Fed. So, while everybody is selling gold because they expect the Fed to taper its asset purchases, the real threat is that the Fed expands its asset purchases.”
Even if the Fed tapers a bit first, ultimately, it will more likely go way up. It’s the only way to fund these massive deficits. The bottom line is larger deficits mean even higher inflation.
In this podcast, Peter also covers the disappointing productivity numbers, the massive expansion of the welfare state coming down the pike, AMC stock and bitcoin.
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