The rate of inflation continues to go up:
So, CPI increased 0.6% in the month of January as compared to December 2021; the consensus estimate was +0.4%.
When compared to January 2021, CPI was 7.5% higher in January 2022. This is the year-over-year figure. Last month it was 7%.
The headline figure was bad enough, but when you break it down by category, you can see that the inflation situation in this country is far worse than even the 7.5% figure would indicate:
It is completely inaccurate to say that prices have only risen 7.5% over the past year. It’s way worse than that in many categories.
And if we go by Shadow Stats, which tracks CPI based on the formula the government used back in 1980, they say the inflation rate right now would be over 15%:
Here’s the explanation SGS provides:
The CPI on the Alternate Data Series tab here reflects the CPI as if it were calculated using the methodologies in place in 1980. In general terms, methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.
In other words, the government has watered down the CPI formula over the years in an effort to constantly paint an optimistic picture of the economy. They’ve done this for virtually all economic indicators, too, which is why websites like SGS exist. SGS also has alternative measures for unemployment, GDP and the US dollar index.
What SGS is telling us is that inflation is currently worse than it was back in the 1980s, because the government lies to you about the numbers to make it seem like things are not that bad.
But people know it’s bad. There’s no real way for the government to truly hide it. People notice when things get more expensive. They’re not dumb.
And I’m gonna go full tinfoil hat here and say that we are actually seeing shrinkflation in addition to inflation. Shrinkflation is a real thing, I didn’t just make it up: it’s when, in an effort to avoid hiking prices, companies reduce the packaging size of products, or simply give you less for the same price. Toothpaste tubes for Crest 3D White, for instance, have decreased from 4.1 ounces to 3.8 ounces.
It’s happening all over the place. I got Wingstop the other day, and I’m pretty sure the wings I got were smaller than usual. I usually order the 20-piece boneless wing meal anytime I get Wingstop (because I can usually get two meals out of it), and I swear the wings were smaller. Maybe I’m just a paranoid loon, but when I got that Wingstop order and opened it up, the first thought that popped into my head was “shrinkflation.” It just felt like I got less food than normal; I noticed it right away because I order Wingstop fairly regularly (once a month on average probably). The price? The same as it used to be if not higher.
Anyway, I’ll digress here. Inflation is at 40-year highs no matter which way you slice it and it is clear that inflation is a serious problem.
What was the market’s reaction?
Basically, a shrug. Markets opened lower, but the dip was quickly bought up and got up to about yesterday’s close.
Why? It’s impossible for someone like me to know for sure, but my guess is that it’s because the 7.5% inflation figure, while high, and higher than expected, wasn’t such a great shock that it caused investors to reevaluate everything. In other words, it was mostly priced in.
Keep in mind markets are still down from their highs, and many stocks are down significantly over the past year. Of the nearly 800 stocks I track, the average decline among them, currently, is 20.46% (median: 15.5% decline). 37% are in a technical bear market right now, even though the S&P 500 is only about 5% off its all-time high and the NYSE index is only 1.6% off.
The point is the market is not in great shape. It has already been falling due to fears over future rate hikes. So, in this light, I do believe this inflation figure was largely priced into the market.
It’s also possible that the market was, in essence, calling the Fed’s bluff and saying, “We don’t believe you’re actually going to hike rates and crash this thing. We think you’re full of it, and we think you will back down.”
And why would they not believe this? For the past 13 years, every single time the market has gotten into trouble, the Fed was there to bail it out. The Fed has always been there to catch investors when they fall.
But that sentiment was, within a few hours, blown to pieces when James Bullard, the President of the St. Louis Fed and a member of the FOMC (which sets Fed policy on interest rates and QE and the like), threw down the gauntlet.
Bullard, who is generally considered one of the more hawkish Fed governors, just now said that he believes interest rates should be moved up to 1% by July 1 (a 100 basis-point move). Markets tanked in response, and are showing a 75% chance of a 50 basis-point hike next month.
Usually, the Fed hikes 25 basis-points (a quarter of a percent) at a time. A 50 basis-point hike would indicate the Fed is essentially panicking over inflation and desperate to get it under control.
This is what I’ve been saying: the Fed takes inflation very seriously. The presence of inflation changes everything when it comes to Fed policy.
Investors have since 2009 become used to an extremely accommodative Fed, but that’s only because there has been no significant inflation to speak of until recently.
Now that there’s inflation, the Fed no longer cares about propping up the stock market and making stocks go to the moon. It’s an entirely different playing field right now, and I don’t think investors fully appreciate that.
The rules of the game have changed.
The Fed is your friend until inflation becomes a problem. At that point, the Fed becomes your enemy. Because the Fed will hike interest rates without any regard for the economy and the markets in order to get inflation under control.
The Fed cares more about taming inflation than it does your stock portfolio. Investors need to get this through their thick skulls.
Last time inflation was this high–back in the early ’80s–interest rates were over 11%.
People do not understand just how much interest rates have to rise in order to get inflation under control.
And they don’t understand how seriously the Fed takes inflation.
All you have to do is look back to the early 1980s to see how the Fed reacts to high inflation: it will hike interest rates until the inflation turns around. They don’t care if it causes a recession and crashes stocks. Getting inflation under control is more important than that. The economy can and will recover. But the US dollar will be destroyed if inflation gets out of control, and that is something the Fed cannot and will not allow.
What name is on the dollars in your wallets? The Federal Reserve.
“FEDERAL RESERVE NOTE”
That is their dollar, and they are not going to allow it to be destroyed by inflation. They no longer give a shit about your stupid little portfolio and your stupid meme stocks.
The rules of the game have changed.
The Fed is no longer going to be there to bail you out anytime your portfolio goes down 20%. Not as long as inflation is roaring.
I think markets finally got the message after Bullard’s comments, but we’ll see. I would not put it past investors to buy the dip here.
Old habits die hard.