The Consumer Price Index came in at 6.9% for the month of November. Amazingly, this was the anticipated forecast by Wall Street. Gold, silver, and oil all got a small bump. The S&P500 is also up slightly.
I guess since the Fed has retired the word “transitory”, the market no longer is worried about inflation running wild. This is the highest the CPI has been since 1982. We are facing year-over-year price increases over 5% and no one in the finance world is acting worried. The Fed has it all under control, they say. The Fed will increase the taper, that will bring down inflation, they say. I believe they are making a big mistake trusting the Fed.
The “core” CPI (that is the CPI without food or energy), also matched expectations when it came in at 4.9%.
The increase in the core CPI was driven by shelter costs, motor vehicle price increases (especially used vehicles), apparel, and transportation services.
The biggest gainer was energy costs.
Here’s the heatmap from Bank of America’s global research team.
month-over-month:
year-over-year
Biden preempted this CPI release with a caveat yesterday that the recent decline in energy costs would not be recognized in this report. While he is correct, I don’t believe we will see it in the next report either. Crude oil has recovered from its Omicron/Thanksgiving plunge and is above $71/barrel. I anticipate that it could continue to move higher. Even if it doesn’t, steady energy costs won’t reduce the CPI. There are too many other factors that are pushing it up. Also, the real news was the food, shelter, and auto increases.
Autos were suppose to be a big factor in the “transitory” story but the increases have stuck around and are getting intense. In addition, shelter costs have begun to catch-up with the actual housing cost increases that consumers are seeing on the ground. On top of both of these, food prices are seeing record price increases. At Thanksgiving, the food increase was all over the right-leaning news channels. Even some of the left-wing channels mentioned the expensive Thanksgiving dinner costs.
The primary cause of the increase escapes most pundits but it shouldn’t escape us. Printing copious amount of money is having a rippling effect across all markets, including the one for food. This isn’t escaping most consumers either. The University of Michigan’s consumer expectations survey was reported today. It contained consumers’ expected change in prices.
Inflation expectations are now at 4.9% for next year. However, the longer term expectations have barely budged. They are continuing to hang around 3%.
Many of the biggest banks are expecting the Fed to announce next week that the Fed will double the pace of the tapering. This idea was laid out by Chairman Powell in his recent testimony to Congress. This has led to an increasingly unstable situation in the stock market. Inflation is charging higher and the Fed is signaling that they hear it loud and clear. Traders believe that the Fed is handling the situation but that removing their monetary accommodation will cause a recession. This is because for the Fed to combat inflation, they will remove liquidity from the markets but ending their asset purchases and raising interest rates. We are seeing that play out in the bond market with a flattening of the yield curve. Investors are moving into traditional “safe haven” assets like bonds and the dollar. In addition to the change in the bond market, the stock market has become very frothy. There is lots of speculation with extreme usage of margin debt and options. The combination of reduced liquidity with extreme speculation is a recipe for high volatility and disaster.
So then what happens next? The Fed is reducing liquidity and the stock market is anticipating a recession. Once the recession does hit, the Fed has two choices.
Option 1; print money to end the recession. This is the standard operating procedure for the Fed. It will paper over the mal-investment but this time it has the real possibility of goosing the CPI higher. If the recession causes the unemployment rate to spike, printing money could be seen as the correct course for the Fed.
Option 2; do nothing. This would allow the market to find a true equilibrium but it would be a political nightmare for the Fed and the current administration. However, the Fed’s hand may be forced to option 2 if inflation is still running wild and the unemployment rate stays low. It may even have to tighten into a recession. This would lead to a nuclear meltdown in the market.
Can the Fed find a way to thread the needle? They would need to reduce liquidity to bring down inflation without causing a recession while keeping asset prices inflated. If this sounds like a tall task, you would be correct.
I’m not going short just yet. I need to see the tea leaves of the M2 report, margin debt levels, and the yield curve but it looks increasingly likely that traders are bracing for the inevitable. In anticipation, I am increasing my stop-loss levels and have been stopped out of a few positions already. It is said that nobody rings a bell when the stock market hits the top but I think I faintly hear something.
i always see the end of the business cycle as false pricing has given the impression that there are 10 sheds of concrete for 10 endeavours but in fact of -real- sheds of concrete there are only 9, so one endeavour is unavoidably doomed to collapse irrespective of rates rising or not as the false pricing decision is already made i.e. the needle is unthreadable because either the price of a shed of concrete inflationary spirals out of affordability eventually collapsing an endeavour, or the in real terms affordability of a price stabilised shed of concrete spirals out of reach collapsing an endeavour. This is presuming that the US is in an expansionary business cycle now and I'm not sure about that.
That aside and I know this is a US centric site, the BOE isn't going to raise rates and considering the Fed is the big dog so to speak, i imagine that means that they don't see any meaninfgul action by the Fed.