Should we still be surprised by inflation data?

gold obviously wasn't

Should we still be surprised at the inflation data at this point? It has continued it’s trek higher in the face of TV pundit, economist, and Fed head talk. Before we get into it, here are the graphs from the Fed.

The CPI climbed higher again. It is now over 7.5% on a year-over-year basis. This surpassed economists estimates of 7.3%. In addition, ‘core’ CPI was also up. It is now over 6%. This also surpassed expectations.

Neither of these should be surprises. Oil has continued its move higher. The SPR (strategic petroleum reserve) release was only able to make a temporary dent in the price. This has since ended and oil is now higher. Also, housing and food costs are steadily moving higher.

The major indexes sold off following the release. In addition, the 10-year Treasury yield climbed and the Fed rate hike expectations became more aggressive.

The CME group’s Fed Watch tool now shows market expectations are for a 50 basis point increase at the March meeting. On top of that, current projections show a 25 basis point increase at every meeting until November. The market now expects the Fed funds target rate to be at 1.5%-1.75% in November. You can check it out for yourself here.

The market fully expect a rate hike at the March meeting. If the Fed doesn’t deliver, I expect a serious selloff in the general indices and a move towards safe haven assets. It will be a total risk-off to risk-on switch. The Fed and investors will get one more look at CPI data before the Fed’s March meeting. I don’t anticipate any dramatic changes. I believe the CPI will continue to hold its high level. The make-up of the CPI doesn’t show signs of relief. We are simply moving from one hot component to the next.

Shelter costs are starting to heat up while vehicles are cooling down. This is typical in inflationary situations. Some components will get hot, then cool down while others start cold and then go hot. There is no uniform rise in prices. They start and stop and then start again. It is part of the reason the “man-on-the-street” has such a hard time understanding what is going on. The inflation tax is a regressive tax, hurting those on fixed incomes and small budgets the worst.

The most shocking part of today’s report wasn’t the market selloff or the rise in the 10 year yield, it was gold’s reaction.

We’ve had a steady climb in gold since the end of January but today got wild. A lot of contracts traded hands today especially at the end of the session. Gold and silver are both long term holdings for me. I prefer to hold physical bullion and numismatic coins. This is so I won’t get shaken out of violent moves like today. I encourage you to stay the course. Hold onto some gold and silver, whether that is physical or paper is up to you.