US Inflation Soars

As I have been predicting for some time, global inlfation is soaring, and the latest US CPI data confirms it.

US CPI has risen by the most since 2008. It has way exceeded the estimates, coming in at 4.2%, year on year, more than double the Federal Reserve's target of 2%. But, the month on month figure, of 0.9%, for core inflation, poses a bigger problem for the Fed. It was three times the estimate of just 0.3%. The headline figure of 0.8%, month on month, was four times the estimate of 0.2%. What poses a bigger problem for the Fed is that, in this data, energy prices actually fell! With oil prices rising sharply across the globe, and more sharply in the US, as the hacking of the Colonial oil pipeline has led to shortages of petrol across a large part of the South-Eastern US, inflation in coming months is set to rise further. Yet, much of the world has not properly reopened following government imposed lockouts, and so the big increase in oil demand is yet to come. Estimates are that, even as OPEC starts to pump more oil, some of the shuttered shale oil producers restart, and Iran restarts larger scale production, as sanctions are removed, supply will still fail to grow as fast as demand, leading to oil prices rising from their current level around $66 a barrel to around $85, a rise of around 30%.

Wherever you look, rising demand is failing to find adequate supply whether it is for copper, computer chips, iron ore, steel, corn, soybeans, or wood. In the US, timber prices have risen from $200 to $1400. That alone has increased the cost of building the average new house by $24,000. The same is true of labour-power. The latest US Job Openings or JOLT, data, showed a record 8 million vacancies, and firms are struggling to get workers at current wages, despite there being a large number of workers still laid off or on furlough as a result of the government lockouts. The combination of rising prices, with labour shortages, and oceans of liquidity pumped into circulation by the central bank is bound to lead to firms bidding up wages as they seek to obtain the labour required to meet rapidly rising order books, and rapidly rising money profits.

But, as I've pointed out in previous months, even these inflation numbers don't tell the real story, because with economies still not fully opened, they still reflect prices of many goods and services in standard baskets that consumers have not been allowed to buy, whilst missing out, or under-weighting, all those that they have been buying. An example of that is the rise in prices of old cars in the US, which rose by 10% in the month alone! I noted some time ago that, using lock-down adjusted price indices, it was estimated that inflation was running at around 10% p.a. That appears confirmed by this data. Taking the 0.9% month on month figure, if that continues for the next year, and, with rising energy and raw material, and food prices still to feed through, that seems at least likely, then by this time next year, that would amount to a more than 12% rise in inflation.

The immediate response of the bond markets was to sell-off, so that bond yields rose. But, the bond markets are massively distorted as a result of QE by central banks, and in no way reflect what is happening with real interest rates in the economy. The effect of the Federal Reserve's QE programme on yields is similar to the effect of a racist cop keeping his knee pressed on the back of your neck, and preventing you inflating your lungs. That together with the fact that, having not seen inflation for more than 30 years, and for all the young inexperienced financial traders, therefore, not having seen it at all, the idea that inflation is going to be more than transient has not sunk in. As former Federal Reserve Board member Bill Dudley has pointed out, therefore, and as I argued a few weeks ago, the Fed will try to keep pumping liquidity into circulation, and buying bonds to prevent the inevitable rise in yields, as long as possible. But, the effect of that will simply be to stoke inflation even further, to stoke the demand for capital even more, as monetary demand rises, pushing up money profits, and encouraging people to buy now rather than face much higher prices tomorrow, and that will push up interest rates in the real economy, which will inevitably feed its way through to yields on financial assets.

As Dudley says, the Fed will wait too long, and so when it acts it will have to act fast and hard. As soon as bond markets begin to realise what is happening, the bond vigilantes will reappear, causing a rapid sell-off in bond markets, and rise in yields. At first, asset allocators will shift from bonds to equities, but as bond yields rise precipitously, and the capitalised value of revenues on assets falls sharply, so all asset classes will be hit, with share prices crashing along with bond and property prices.

The day of reckoning for all of the financial bubbles blown up over the last thirty years is approaching.