Inflationary Rocket Train Accelerating Rapidly

We’ve now hit that critical juncture when price inflation is picking up momentum quickly. So, it is time I reveal the many areas were high inflation is starting to show up and as well as demonstrate the fuel source that will drive it up even more in the near future.

Shortly after COVID assailed the world, I began to say, especially in my Patron Posts, that we had finally entered a period where, for the first time since I’ve been writing this blog, I could see inflation as becoming a serious problem. Unlike many bearish types, I haven’t said it will become the hyperinflation the permabears have been sure the Fed’s money printing would create for years.

Yet, I started saying last year, significant inflation would be something to start watching out for. At the time it was not present, but it was something I thought would start rising in the year ahead. It could easily push bond interest high enough to threaten the stock market. It could put the brakes on the Fed’s plans to do more stimulus down the road or derail those plans entirely by crashing stocks and bond prices simultaneously. (Higher bond interest/yields equals lower bond prices.) Inflation doesn’t have to go parabolic to cause those kinds of serious problems, besides the dent it will put in your pocketbook.

Even if we don’t see anything like hyperinflation (often defined as 100% annual inflation or more), a return to the double-digit inflation of seventies would force interest rates up to double digits, too, just as Fed Chair Paul Volcker had to do in the eighties to tame inflation. Market forces alone will likely push bonds up there if inflation goes up there. (The US hasn’t experienced much in the way of negative real interest rates (i.e. after adjusting for inflation) and probably won’t.)

However, with corporations, individuals, and especially the government so much more deeply indebted now than back in the eighties, a return to the interest rates that Paul Volcker used to slow the runaway inflation train would be devastating compared to how it hit everyone back then, and it was hard medicine to digest then.

As inflation is building up tremendous force in our rocket-powered train, the Fed is preparing us to avoid panicking on the curves ahead when the train leans out of the curves by telling us now that it intends to run inflation hot (as in around 2.5%) for quite awhile. It wants us to know that is just part of the thrill ride we’re getting on, and it is comforting us with statements that the present inflation we are seeing is transitory. We will, in other words, all step off the ride safely on the other side.

However, present inflation is already pushing outside the curve (beyond 2.5%), and I think it will not be as transitory as the Fed wants to believe (or wants us to believe). So, here is the lay of the land that this train is already careening through.

Steep slope ahead for businesses

First, let’s look at the inflation that is already happening beneath the surface where consumers don’t necessarily see it right away — the cost inflation on the production and services side of the economy that is already increasing pressure to raise prices on the consumer side. The Institute for Supply Management’s Service Index shows input prices in the services sector have risen at their fastest rate in a decade:

The survey of manufacturers shows the same rapid rise. The Producer Price Index (PPI) — prices at the wholesale level — rose 4.2% year on year and 1% just month on month, indicating it is picking up speed in the most recent months to a level that is twice as hot as the already hot figure that was anticipated by most economists:

As go producer prices, so eventually go consumer prices. Businesses are going to be forced to pass this huge escalation in their costs to the prices they charge consumers, and that move is already building velocity:

The rate of inflation accelerated to the fastest since data collection for the services survey began in October 2009. Anecdotal evidence widely linked the uptick in costs to higher prices for key inputs such as PPE, paper, plastics, fuel and transportation. Subsequently, firms sought to pass on higher costs to clients through a sharper rise in selling prices. A number of companies also stated that stronger client demand allowed a greater proportion of the hike in costs to be passed through. The resulting rate of [change to] inflation was the quickest on record.

Zero Hedge

From that, you can easily see what is coming down the road for the Consumer Price Index (CPI) — the most common gauge of price inflation used in the US. Producers may not be able to pass all of their increasing costs along, but they will be pressured to try, and abundant Fed money will make it easier to pass it along, as I projected a year ago, because the magic formula or runaway inflation is too few goods (and/or services) in an environment of too much money.

As a result of Fed and federal government largesse, scarce goods or services that are getting much more expensive to produce will find consumers willing and able to bid up the price to get their hands on some of the limited supply. Moreover, in the present environment, COVID scares could cause stockpiling and hoarding, such as we saw last spring. We see see this willingness to pay astronomically higher prices due to scarcity playing out already in housing on all across the nation. While unpopular areas under the new demographics are going down in price, other areas are exploding, and individuals are using their savings from stimulus to increase down payments. (More on that down the page.)

IHS’s similar survey of services shows input cost increases and output charge inflation have already hit all-time record levels. So, business is recovering from the COVIDcrash, but it is doing so at much greater input costs and is starting to pass that along.

Belaboring labor costs

It’s a peculiarity of our times that businesses are having to pay a lot more to get employees during a time of record unemployment than they had to pay before the pandemic. That singular event has come about because businesses must compete against government largesse to entice people into taking jobs because those who lost their jobs to COVID can make more by not applying for new jobs and staying on unemployment with all its stimulus benefits. In many states they don’t even have to apply for jobs right now to keep getting unemployment benefits. Initial unemployment claims, in fact, rose, even as record new jobs opened up last month (more on that in another article). Continuing claims fell modestly, but still hover at over 18 million.

While job openings went on a tear last month, new hires did not. The shortage in workers will mean a shortage in product out the other end, and that will mean shortages to consumers, which is a bigger factor in diving up prices than Fed money creation. (When supply is abundant, there is no reason for abundant money to increase prices. Because so many suppliers are competing for the available consumers, those consumers won’t have to pay more just because they have more money.)

Hotels have increased wages 15% above their PRE-pandemic level in order to get enough workers.

As pressure from all these expenses puts a squeeze on business profit margins, it’s bound to put a squeeze on stock prices. Inflation causing bond vigilantes to raise interest rates, will increase the dividend stocks need to pay to entice investors. So, this is where inflation in business costs can start to hurt the stock market when stock investors finally start paying attention to economic fundamentals. Right now the stock market is floating longer than I thought it would on pure hopium, and it may get even more supercharged due to grossly errant economic reporting about year-on-year gains that is certain to come in the near future. (More on that in future articles, too.)

Consumer prices already riding the runaway train

These higher costs are already barreling into the consumer space. Analysts expected a boost in CPI based on what was already reported from producer price indices above, but they actually got a bigger lurch forward than they were anticipating. Headline CPI reported on Tuesday of this week accelerated 0.6% month-on-month. Now, if that were to continue every month, we’d be at 15% inflation by the end of the year. Granted such gains almost never continue like that every month; but these are peculiar times where price jumps may happen longer than normal.

Moreover, this kind of inflation can become a self-feeding loop where speculators see inflation is running out of control and start speculating up the price of commodities more quickly, causing further cost rises in production that are purely driven by speculation.

Looking back down the track to where we were a year ago, the latest report already puts CPI at the Fed’s “hot” target of 2.5% YoY. So, the Fed has no room to run hotter without exceeding its stated target for annual inflation. However, it will throw a little cold water on public concern by denying some of the real inflation, which it does by talking exclusively about “core inflation” … as if inflation in more volatile things like fuel never ever has to be factored in just because it has seasonal ups and down or is prone to speculation that make it volatile. Bear in mind, as the Fed attempts to jawbone away concerns about inflation, the consumer train has only just left the station.

Yet, it’s already seen the hottest one-month thrust since June of 2009. So, I think the Fed is already smashing through its hotness target.

You can see that year-on-year CPI is tracking perfectly with producer prices, as it always does, but the PPI is running up further ahead of CPI than it has anytime in the past decade:

That simply means CPI has a lot of catching up to do, which it will do because it always does. (Trains don’t accelerate quickly because they have a lot of inertia, but they don’t slow down quickly either once they get up to speed. This one, however, is looking a bit like a rocket train.)

Imagine how grandly worse it would look if the Fed actually tracked real housing inflation! Housing is, after all, most people’s number-one household expense, and the Fed continually underestimates it. For those locked into an existing mortgage, newly rising housing prices are not a matter of concern, except as they come to be reflected in property taxes; but, for all renters, rising rents are matter of great concern; and, for all who are buying a home in the present market, rising housing prices (and construction costs) are the biggest inflation concern they’ve experienced in a lifetime. (But more on that down the page.)

The report “is the clearest indication so far that the signs of mounting inflation evident in business surveys and producer prices are feeding through to stronger consumer prices,” wrote Michael Pearce, senior U.S. economist at Capital Economics.

CNBC

The biggest driver in the rising CPI was, without much surprise, energy; but that is one of those costs the Fed continually factors out as if it is irrelevant to consumers, even though it is their second-biggest household budget item. The Fed takes it out of what it calls “core inflation” because it is so seasonally volatile and so prone to market speculation. (However, that doesn’t mean it doesn’t hit your pocket book or that it never inflates over the long term just because it has short-term spikes that come and go. Nor does it mean the ledgers of businesses don’t have to factor that into their product/service pricing.) The Fed can pretend energy price rises don’t count because the Fed doesn’t know how to handle them, but the rest of us have to handle them everyday as our economic reality, whether the Fed acknowledges that or not.

Not too surprisingly, restaurant prices jumped 6.5% YoY. When you think about how restaurants have to operate in many locations at a restricted 50% capacity, it would surprise me that they could even turn a profit at 6.5% higher prices. Overhead doesn’t go down when capacity utilization drops. Many expenses are fixed.

Heres what I really got a kick out of this month: I read some articles seriously trying to dismiss the huge CPI jump by claiming prices are only up year on year right now because they are comparing to last March when we took the COVID plunge. None of those articles presented any data to support that incongruous and extraordinary claim.

I don’t buy that explanation for the current YoY high price inflation at all. Intriguingly, I don’t hear anyone applying that argument to the first big week of corporate earnings being reported (because they don’t want to). I think that comparison to the month of the lockdown is essential for earnings, but totally irrelevant for prices. Reason? Prices for the most part did not drop when we plunged into economic chaos. They rose because of shortages. Fuel dropped, and tourism-related prices dropped. Food and essentials rose. In terms of most of the prices you pay every day, price gouging was more likely than price drops.

But it gets so much worse.

Unable to swallow the excuse that prices are just appearing to rise now because they are being compared to a baseline set in last March’s big economic bust, when prices supposedly crashed, I’ve searched further to see if anyone sees things my way. Wolf Richter, whose opinions I always respect, reveals the numbers look worse as you dig down into the details. (See “Dollar’s Purchasing Power Drops Sharply to Record Low, But It’s a Lot Worse than CPI Shows.”)

Rummaging down through prices to March, 2020, he saw a slight dip in overall prices did happen last March. That was because falling prices in energy and tourism slightly outweighed rising prices in other areas — very slightly. When adjusting last March’s anomalies back out by looking prepandemic, instead, to last February, he discovered, we still have 2.3% overall inflation rate year-on-year from February 2020 to this March. However, prices of durable goods (like refrigerators and cars and washing machines) are up 3.7%. Prices of non-durable goods, like food and energy are worse at 4.7%. (Note that about 50% of CPI is adjustments.)

But here is the kicker: The overall rise in consumer price inflation was kept down to that high 2.3% level (if adjusted for the March anomaly) because housing showed a mere — get this — 2% increase from a year ago, and housing costs make up almost a third of total CPI, so a low reading there has a large impact on overall inflation a measured in the Consumer Price Index!

It seems the BLS is having trouble keeping up with its statistics now that prices are increasing so quickly:

Can we make Biden’s infrastructure plan $1 trillion bigger so the BLS can update its website pic.twitter.com/0qrGdj670R

— zerohedge (@zerohedge) April 9, 2021

Inflation train takes out new housing development

Anyone who has paid even casual attention to the rental market and the home purchasing market knows inflation in housing has never been worse than the past year. So, the purported 2% increase from a year ago is so ludicrous you have to wonder how the Bureau of Lying Statistics can even keep a straight face when they present it.

I’ve written in the past about the bizarre way the BLS calculates inflation of housing costs, so I won’t write a lot about it again now. I’ll just say it’s a worst-guess scenario that goes by a survey of what minimally informed homeowners think they could rent their houses out for if they were to put them on the rental market. That’s right — people who haven’t rented anything in years take a stab at what their homes would rent for. The least hard or scientific or controlled of all numbers, therefore, is the one conveniently holding CPI down to a “mere” 2.3% at a time when we know that particular number is actually rising faster than any of the other numbers across most of the nation! Housing is the real runaway train here.

Here’s a comparison to what the worst-guess scenario for housing prices has graphed as in housing’s portion of CPI over the years (red line), versus what real housing prices have done, according to the Case-Shiller Index (purple line):

The purple line is actual national prices, while the red line is what CPI has shown based on BLS guesstimates (with an emphasis on guess) from homeowners taking a stab at what their houses would rent for and compiling that with real rents. The red line is consistently so far out of whack with actual closing prices on all home sales in the US that using that guesstimate is not even an error. It’s just a blatantly dishonest way to make inflation perpetually sound less severe than it is so the government can assuage consumers and also keep down its escalation of Social Security benefits, tagged to CPI. It’s probably also been cemented in place by lobbyists hired to help businesses keep down their labor wage increases that are often pegged to CPI. The best one can say is that when the housing market was at its extreme worst, it touched down to the CPI level on just one month out of twenty years!

Remember, my statement early on in the COVIDcrisis was that you need two parts in the chemistry to achieve high consumer price inflation — abundant money (which the Fed and Feds have been delivering) and shortages of goods are services — too much money chasing too few goods. Nowhere is that illustrated better — and nowhere does it come closer to starting to feel like hyperinflation — than in housing right now:

The U.S. housing market is 3.8 million single-family homes short of what is needed to meet the country’s demand, according to a new analysis by mortgage-finance company Freddie Mac. The estimate represents a 52% rise in the nation’s home shortage compared with 2018, the first time Freddie Mac quantified the shortfall. The figures underscore the severity of the housing deficit, which is a major factor fueling the current red-hot housing market.

Wall Street Journal

To say it short and sweet:

The residential real-estate market is on its biggest tear since 2006.

WSJ

And, according to another Journal article, the escalation is pervasive:

The median sales price for existing homes in each of more than 180 metro areas tracked by the National Association of Realtors rose in the fourth quarter from a year earlier, the association said Thursday. That is the second consecutive quarter that every metro area tracked by NAR posted an annual price increase, marking the first time this milestone has been achieved in back-to-back quarters.

WSJ

Nationally, median housing prices are actually up more than 11% YoY. There is a caveat, and maybe it is what is skewing the BLS lying numbers: If you are in a forbearance program for rent or mortgage payments, your payment has fallen to nothing, but that all has to be made up eventually. For those paying real rent and/or buying a new or existing house, housing costs are going … well … through the roof. Better get that roof fixed.

Looking at the next biggest big-ticket item in the average budget — automobiles — take a glance at what happened to used-vehicle prices over the course of the past COVID year in which I said inflation would become a big concern:

That one’s a blowout, too.

But now the inflation punch is going to hit you in gut!

“Get ready for higher grocery bills for the rest of the year“

The latest spike in grocery bills comes on the back of prices that rose during last year’s pandemic stockpiling — and never went down.

NBC

How’s that for flying in the face of what the anti-inflationistas are saying about inflation only looking bad year-on-year because prices dropped so much in March of 2020? Au contraire. They rose in the grocery department substantially in March, 2020, NEVER went back down, and now are spiking again!

Shoppers had better start budgeting more for their groceries, according to the latest consumer price index, which shows prices are increasing — and they’re likely to keep going up….

Dig below the baloney adjustments, and Groceries (unadjusted) are up 3.5% from last March, and last March was a time of rampant stockpiling, widespread shortages and some price gouging. Heck, just between the start of this February and end of this March, prices of fruit and vegetables rose almost 2%!

And it gets worse: not only are regular prices up, but the number of items being offered on coupon sales are way down. (That’s buried price inflation.)

“In a typical month, 31.5 percent of units are sold on promotion; in the most recent period of March, 28.6 percent of units were sold on promotion,” Phil Tedesco, vice president for retail intelligent analytics at NielsenIQ, said in an email. “This has led to shoppers having fewer opportunities to take advantage of sales in the store,” increasing total costs.

Some of the price rise in produce is due to crop damage, but you have some of that every year, and this year was not extraordinary in that respect. Another factor is the rise in cost of Chinese imports due to trade wars. Another is the rise in transportation costs due to COVID border barriers. The biggest factor, though, according to a supply-chain software company is damaged supply chains.

Fueling the inflation train

Let’s dig deeper into the ingredients that go into all the things we buy. Looking back to that grocery bill, corn, which is in many products, Is up 80%. Looking to the housing hit, the Bloomberg Commodities Index is up overall 33% from a year ago. Due to the housing crunch, which has led to a sudden building spree, lumber is up 280%. A single 2×4 stud that sold for about $3.50 a year go, now sells for $9-10. Copper has doubled in price from a year ago.

I just read one person who set up a false argument saying,

We have established that there are probably three primary drivers of the rise in commodity prices: 1) A belief in a genuine, post-pandemic economic recovery, 2) A Fed that will continue to support the recovery with lower interest rates, and 3) A government that’s willing to continue its spending spree.

Seeking Alpha

Those may be the three primary factors that drive speculation in commodities, which is often the most determinative aspect of prices; but they are only the usual factors because we don’t usually have widespread shortages in the US. I’d say SUPPLY is THE primary factor and greater than any of the three in that false limitation of choices.

So, what about price inflation due to shortages caused by transportation problems in a world of COVID-restricted border crossings? What about shortages caused by mining, farming and processing stoppages created by COVID economic shutdowns when employees were afraid to go back to work early on in the crisis now showing up in available warehoused supply, as I warned about last spring? What about shortages caused by a lack of labor in those fields now when people can make more remaining unemployed than by finding a new job? (Obviously, those who get their old jobs offered back don’t have that benefit option, but I’m talking about those whose jobs were permanently lost, who are now less likely to look for or take available jobs if they make more on unemployment.) Which brings us to what about shortages caused by all those businesses that went permanently out of business during COVID lockdowns?

Clearly shortages are a major factor right now in the supply side of the supply-and-demand pricing equation. The person writing above has forgotten all about basic economics.

We’re on the Federal express train to nowhere

Finally, here’s a little clue the Fed may be getting concerned that people who are watching the Fed are getting concerned about where its rampant money printing is going, wondering if the bridge is out ahead:

Having increased money supply by 500% in the past year, the Fed has stopped reporting increases of M1 and M2 money supply (the most liquid forms of cash). Do you see any chance they might have quit reporting that out of fear they will have to print a lot more to keep this Ponzi scheme running leading to fear that everyone else will fear the Fed is losing control of this express train if everyone else sees how much more fuel they they are dumping into the engines as we approach the missing bridge to nowhere?

Why else would they stop reporting it as if it is suddenly a matter of no interest just when it is actually getting most interesting because interest is rising? I’ll actually give you a possible “why else,” but it’s not a good one.

I mentioned awhile back that I noticed money supply had gone through the roof (up almost a trillion dollars) while bank reserves were plummeting, and I wrote to the Fed to get their answer to this huge anomaly (given that previous rounds of QE had not raised money supply anything like the present while causing reserves to plummet. Rather, reserves soared. Here is the answer I got back from the Fed, which also explains on the surface why the Fed stopped reporting M1 and M2 money supply altogether (likely because people like me were saying, “What’s going on here?”)

Thank you for your question. As announced on March 15, 2020, the Board of Governors reduced reserve requirement ratios on net transaction accounts to 0 percent, effective March 26, 2020. This action eliminated reserve requirements for all depository institutions and rendered the regulatory distinction between reservable “transaction accounts” and nonreservable “savings deposits” unnecessary. On April 24, 2020, the Board removed this regulatory distinction by deleting the six-per-month transfer limit on savings deposits in Regulation D. This action resulted in savings deposits having a similar regulatory definition and the same liquidity characteristics as the transaction accounts previously reported as “Other checkable deposits” on the H.6 statistical release. With the change in Regulation D, the Board initially provided depository institutions flexibility in how they reported savings deposits on the reports of deposits, which are the reports used to construct the monetary aggregates. Depository institutions could report them either as saving deposits or as transaction accounts. If depository institutions continued to report them as savings deposits, no impact on H.6 release items “Savings deposits” or the M1 and M2 monetary aggregates resulted. However, if depository institutions shifted their reporting of savings deposits to transaction accounts, the H.6 release item “Savings deposits” decreased and a deposit component of the M1 monetary aggregate along with the aggregate itself increased.

In late 2020, the Board approved revised reports of deposits to combine the reporting of savings deposits with similarly defined transaction accounts and announced revisions to the H.6 release to recognize savings deposits as a type of transaction account.  The recognition on the H.6 release was implemented with the February 23, 2020 release and was retroactively applied back to May 2020.  For more information on the H.6 release changes, please see the H.6 release announcements dated December 17, 2020 and February 23, 2021 (https://www.federalreserve.gov/feeds/h6.html).

“O.K.,” you say, “Fair enough” to the Fed. “They’re not afraid of anything here, Dave. They’re just not tracking categories of money that have become meaningless in a world where banks no longer have any reserve requirements due to Fed regulatory changes or any regulatory limit on what they call ‘liquid money’ — M1 and M2. They’re just saying those terms have been rendered meaningless.”

Well, hold on a minute! How is that better? What the Fed is really saying is that it has taken all governors off the locomotive’s engines and is pressing full throttle into the next curve … oh, and it has disconnected all the warning gauges because, having already decided it’s going to run this train full throttle no mater what, who cares what the gauges say???

That means quite pointedly we’re in a different banking universe than most of us have known in our lifetimes. How it that not more likely than in any times past to run hyper-inflationary or, at least, to destructive levels of inflation that blow out the next curve?

Stagflation is arriving now

It’s not just around the bend. It’s here.

The worst news comes when prices rise but the economy remains stagnant or even sinks, regardless of all stimulus. That’s called “stagflation,” and it looks like it is already forming:

The big threat is stagflation as while prices are exploding higher (prices paid for materials jumped to 74, the highest since July 2008….) Real manufacturing – factory orders – are tumbling…

Zero Hedge

We have the perfect set-up for stagflation. The real economy can’t get fully on track because of COVID restrictions continuing to derail international transport, services, and to a lesser extent manufacturing for all the reasons laid out above. That means the train is running full throttle, but its wheels are no longer on rails, so it’s not going anywhere good. That may, in fact, be because it’s already sailed off the missing bridge to nowhere. While headlines about the economy will proclaim a massive year-over-year rebound, starting from March statistics and especially April, I guarantee you the facts will be enormously misrepresented as to their significance. Total economic activity will be paltry compared to previous years.

How does that add up? I’m sure I’ll be writing more correctives to other financial reporting that misrepresents what is about to happen, but the gist of what you are likely going to see is simple. Economic activity compared to the same month a year ago will appear to show massive growth for the next few months because March through June in particular a year ago were the worst months since the Great Depression, and maybe even worse than that (since reliable statistics were not kept during the Depression and are largely inferred). That will make those months easy to beat by what looks like a landslide.

BUT …

If you measure TOTAL economic activity in any of those months this year against PRE-pandemic months, you’ll see our eight-cylinder economy is really only firing on about six cylinders and running kind of smokey. It’s a matter of your baseline. If you measure the economy this year against the worst months since the Great Depression, it will appear to be on a tear, even though it is really falling way behind any recent year of performance.

In terms of stagflation, that means unemployment will remain extremely high and productivity low, so product availability will get even more scarce; yet, people will have more money than they are used to having because of government stimulus checks to all households, unemployment stimulus augmentation, rent forbearance and mortgage forbearance. That’s the perfect setup for too much money chasing too few goods and services. Because so many people are not at work producing and serving but still have money, the scarce goods and services will get bid up in price.

So, hold onto your seats because this inflation train might be picking up speed as the economy falls away from under it. It could become full rocket throttle with rapid gravitational acceleration to the bottom of the unbridged canyon because even trains with rockets don’t have wings to fly!