Inflation at 8.6% and rising

Average gasoline prices are now above $5/gallon

The consumer price index numbers are out for May and they’re not pretty. Total CPI was up 1% month-on-month in May, and core CPI (total CPI minus food & energy) was up 0.6%. That brings the respective year-on-year totals to 8.6% and 6%.

The transitory inflation gig has been up for a while, yet a lot of people are still hanging on. Many people pointed towards Target’s warning of lower earnings last Wednesday as they told investors they had a 43% year-on-year rise in inventory. This was taken the wrong way by a lot of investors on Wall Street, thinking that this was good news on the inflation front because it meant that Target would be slashing prices to sell down its bloated inventory. This, however, is the conclusion you come to when you look at surface level data and nothing more.

Target saw post-lockdown spikes in consumer spending on discretionary goods as consumers had money in the bank from stimulus checks. They mistakenly took this spike as a permanent trend and decided to load off on goods expecting consumers to continue spending on these goods. After a few quarters of elevated discretionary spending, consumers’ have been forced to slow down because of inflationary pressures on core expenditures such as food, energy, gas, cars, housing, insuring, etc.

Compared to May 2021, food prices are up 10%, average house prices are up over 20%, average gas prices are above $5/gallon when they were $3.07/gallon last year. Inflation is destroying true purchasing power of the middle class and that is why Target – and other major stores – have increasing inventories. It’s not because of disinflation, but because consumers don’t have enough money to spend on discretionary goods because a higher percentage of their earnings is being spent on essential items.

People are also failing to realize that once Target sells its excess inventory, it will not be maintaining the same high level inventory as it does now, which means that the sales they may be putting on now are only a temporary price reduction.

What does this mean for interest rates?

The Federal Open Market Committee are meeting on June 14th and 15th, and consensus expectations are for another 50 basis point rate hike. This would follow the 25 point hike in March and 50 point hike in May, bringing the federal funds rate range to 1.25% – 1.5%.

Goldman Sachs said that this morning’s inflation numbers have changed their expectations for this year’s rate trajectory: “we now expect the Fed to hike the funds rate by 50 bps in September (vs 25 basis points previously), in addition to 50 basis point moves in June and in July”.

Yet, as rate hike expectations increase across the board, gold is up over 1% in the first hours of trading, possibly a sign that some investors are starting to lose faith in the fed’s ability (or willingness) to fight inflation. As the months go on, we believe more investors will adopt this view of the market. Little 50 basis point rate hikes will never stop an 8.6% official inflation number – with the real inflation figure is closer to 20% if you factor in true housing/rent prices instead of using the farcical owner’s equivalent rent that is used in the official CPI.

We expect inflation to continue its current trajectory for the foreseeable future, with the fed coming under increasing pressure to speed-up the pace of hikes. The fed will likely speak about speeding-up hikes because it will temporarily calm markets, but it will never act on it. The fed’s aim right now is not to fight inflation as people mistakenly believe. If they fight inflation the economy is done for, because as we have discussed previously, the economy just can’t take it. Their true aim is to calm markets using words, and words only. It will become clear in the coming months that stagflation is here, and a recessionary economy will give Powell an excuse to slow down or even rollback rate hikes before they becomes detrimental to the U.S. At which stage gold will likely be well above all-time-highs as fear of spiralling inflation occupy everyone’s mind.

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