Edition #118

CPI Inflation Hits Multi-Decade Record

Hey everyone,

The significant majority of this newsletter has been focused on three things regarding the economic environment: inflation, the labor market, and the Federal Reserve. While we occasionally deviate from these core pillars, nearly all topics we’ve discussed, including shipping & container rates, personal savings rates, real yields, consumer credit, and household wealth, are all tied back to inflation, labor, and the Fed.

At the end of 2020, I was fairly convinced that inflation would be extremely limited despite the Fed’s massive monetary stimulus. Inflation failed to arise in the wake of the Fed’s stimulus after the Great Recession, and I thought those same factors that limited inflation in the past were in effect today. As 2021 continued to move along and inflation became more apparent, I remained aligned with the Federal Reserve’s presumption that inflation would be transitory. During that time, I specifically said that I think inflation would be greater than the Fed’s expectations, but would return to normal levels over time. In Edition #6, published on 5/24/21, I wrote the following:

“This is not an attempt to feed into an inflationary frenzy or to insinuate that I think hyper-inflation is around the corner - I truly don’t believe that will happen. With that said, I believe the Fed has done a sufficient job of downplaying how high inflation can rise over the next 24 months through their rhetoric & consistent reassurances that they’ll be able to reel in consumer prices if/when they need to. From my perspective, I wouldn’t be surprised if we see the 12-month CPI inflation numbers between +6% to +10% at some point in 2021. Even in this forecast, I think it’s far more reasonable that the CPI inflations remains below +7%, but I’m certainly open to the idea that we move higher than that. Time will tell, but I thought this data on the wholesale used car index was worthwhile to share.

At the time I wrote this, the 12-month inflation rate for May 2021 was +4.2% (since revised to +5.0%). Yesterday, my prediction officially came true. With the October CPI report being released yesterday morning at 8:30am ET, the 12-month CPI inflation rate hit +6.2%. According to data from the Bureau of Labor Statistics, this is the highest 12-month inflation rate since December 1990. Looking over the data, here is the 12-month rate of change in the consumer price index:

The data since May 2021 is as follows

• May 2021: +5.0%

• June 2021: +5.4%

• July 2021: +5.4%

• August 2021: +5.3%

• September 2021: +5.4%

• October 2021: +6.2%

With January 2021 having a 12-month rate of change of +1.4%, this acceleration has been historic for the U.S.’s inflation standards. If we consider that the month-over-month inflation rate from September 2021 to October 2021 was +0.6%, we can calculate the annualized rate through the following formula: (1.006)^12 = 7.4%.

The Fed had repeatedly stated that their expectation was for an uptick in the inflation rate to be transitory, creating an initial spike higher from the deflation we experienced in Q2 2020. These “base effects” would create amplified levels of inflation in the current environment when comparing to the low levels from the prior year. Now that those base effects have been discredited, the reasoning has been that energy prices and supply-chain bottlenecks are the source of the trouble, creating a shortage with the uptick in demand from a strong consumer. High demand plus supply pressures would theoretically contribute to why inflation has been high, but it doesn’t excuse the fact that inflation is high. We were told it wouldn’t be, or at least not for long. Now we’re 6 months into an inflation rate over +5% and the trend is rising.

Former Chairwoman of the Federal Reserve and the current Treasury Secretary, Janet Yellen, has continued to rapidly & dramatically change her stance on inflation.

I have zero qualms with her being wrong, as we can only say she was wrong in hindsight. I have plenty of issues her continuing to shift the goal post, using strong language in attempt to quiet the fears & concerns around inflation, just to simply make a new lofty claim a few months later. Being wrong is okay, staying wrong is not.

Oddly enough, central bankers and government officials are quick to blame the sustained acceleration in inflation on everything other than the fact of central bank activity, monetary policy & fiscal spending.

Supply chain dynamics are certainly a factor contributing to higher inflation, but are just one piece to the puzzle. I tend to think an inflation in the money supply, followed by massive government spending & fiscal stimulus, leads to an inflation in consumer prices. Remember, here’s what Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, had to say in the midst of the market meltdown last year as COVID spread with a high degree of uncertainty.

He specifically argues why going above and beyond was the right approach vs. using targeting and limited approach. To be crystal clear, I don’t blame the Fed’s actions or the fiscal response from the Trump and Biden administrations, but let’s call a spade a spade and not deflect responsibility to extraneous factors.

In conclusion, I don’t believe we’re going to enter a period of hyperinflation, but reiterate my target of a peak inflation rate of 6-10% on a trailing 12-month basis as I’ve been predicting since May 2021. It now appears that this peak will be achieved sometime in Q1 or Q2 of 2022 rather than in 2021. I’m also not worried about stagflation, but I see that scenario as more likely than hyperinflation. I hope I’m wrong and that inflation rotates lower from here. Yesterday was a somber day for me personally, recognizing that my prediction came true and that there are real consequences behind the +6.2% number. There are struggling families facing price pressures and a deterioration in their living standards. Inflation hits the lower-class significantly harder than any other income group because they don’t have the means to buy inflation-protecting assets (real estate, stocks, Bitcoin). Similarly, they often don’t have access to loans and don’t benefit from negative real returns. With meats, fish, and eggs up on average +11.9% vs. October 2020, that’s a considerable increase for multi-person families.

As an FYI, Bitcoin does indeed fix this. It offers individuals and institutions a way to opt into a programmatic, supply-limited, immutable, and universally transferrable monetary system. Rather than trusting central banks, we now have an opportunity to trust open-source code and an insurmountable amount of compute-power to verify, defend, and secure the monetary network. I wish I accepted this truth sooner.

Similar to how we have an ability to vote politically via our ballots, we also have an ability to vote economically with our dollars, time and labor. Choose wisely.

Talk soon,

Caleb Franzen