The below is a direct extract from Marty’s Bent Number 1261: “CPI shocks markets.” Subscribe to the newsletter here.
The August 2022 Consumer Price Index (CPI) print was released on September 13, 2022, and it reached 8.3% year-on-year growth, and shocked all the talking heads that were certain that inflation needed to slow because all the demand destruction the Federal Reserve tried to manufacture would start to hit the markets. Markets did not react well to the higher-than-expected release, with all major indices falling around 4-5% across the board. Worse still, the reported figure of 8.3% appears to grossly underestimate the true level of price inflation that consumers are currently experiencing.
I think it’s safe to say that the basket of goods listed above can be considered essential goods for anyone trying to live a life of relative comfort. When you see these numbers, it’s hard not to be completely insulted that the Fed and the Bureau of Labor Statistics are trying to trick you into believing that prices only rose 8.3%. What’s even worse is that this year-over-year impression is built on a relatively high base that was set in August 2021. If you forget about it, inflation has started to kick in. the summer of 2021 and this month of August resulted in an impression of 5.3%. 3.3% above the Fed’s historic 2% target.
There are plenty of inflation experts today who try to portray today’s impression as positive, saying things like, “Month-over-month growth is basically flat. Inflation is starting to slow and we should see the full effects of demand destruction begin to be felt in the months ahead. updates, the depletion of Strategic Petroleum Reserves (SPR) and the fact that we are heading into winter.
Draining the SPR contributed to artificially distorting inflation at the pump. With the SPR expected to be completely exhausted sometime next month, with drill crews stretched to their limits here in the United States and the Biden administration adamantly determined not to allow new drilling permits to be granted. , oil supply and gas markets will experience a significant shock, which will put upward pressure on gas prices. Add to that the fact that we are heading into the fall and winter months where energy demand begins to increase significantly as people begin to turn up their home heating and travel more for holidays, and it’s not hard to see that we may be in the eye of the inflationary storm. Only by focusing on energy prices.
As the world has come to discover, energy prices, especially natural gas prices, are key inputs into food supply chains. With prices rising significantly earlier this year during the planting season, it should come as no shock to people to see lagging food inflation hitting markets later in 2022 as well. To make matters worse, it looks like the United States is keen to escalate matters with China over its encroachment on Taiwan’s sovereignty.
More penalties in 2022 should work out great for consumers. If the United States decides to go ahead with sanctions, it could exacerbate inflation problems in two ways, making it more expensive or impossible for Americans to access China’s manufacturing capacity and/or stoking a backlash from China by increasing military activity around Taiwan, making it harder for international markets to access vital computer chips produced by TSMC.
While many talking heads would like you to believe that inflation is slowing down, all I can see is things developing that will only make the problems we are experiencing much worse. Believe it or not, we may be in the eye of the inflationary hurricane.