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What's Hiding Behind the “Disinflation” Smoke and Mirrors?

Two weeks after the press conference, the Fed’s touted “disinflation” popped like a Chinese spy balloon. Today pull back the curtain and discover an undeniable trend…

What's Hiding Behind the Disinflation Smoke and Mirrors?
Photo by Fengyou Wan

From Peter Reagan at Birch Gold Group

When the Biden administration, the Treasury Department and the Fed have all turned out to be wrong about inflation to this point, they’re eager to tout any hint of positive news.

For example, “Here’s where inflation is easing,” a piece on recent Bloomberg article claimed. (Yes, you do have to look rather closely to find examples.)

“The disinflationary process has begun,” Chairman Powell announced to various media outlets.

“The strongest economy in history!” President Biden keeps repeating.

Well, older Americans aren’t buying it. (Nor should they).

Now, I’m a fan of positive economic news, except when it’s imaginary. I do not appreciate being smoke-screened or gaslit for any reason, especially for a political reason.

I assume you’re the same way, and prefer the real story over the feel-good, fake-it-till-you-make-it propaganda flooding the airwaves.

So let’s take a moment and examine the real inflationary picture.

We’ll start with commentary on the most recent official report:

The consumer price index, which measures a broad basket of common goods and services, rose 0.5% in January, which translated to an annual gain of 6.4%. Economists surveyed by Dow Jones had been looking for respective increases of 0.4% and 6.2%.

Rising shelter costs accounted for about half the monthly increase, the Bureau of Labor Statistics said in the report…

Energy also was a significant contributor, up 2% and 8.7%, respectively, while food costs rose 0.5% and 10.1%, respectively.

Average hourly earnings fell 0.2% for the month and were down 1.8% from a year ago.

Looks to me like prices went up on popular consumer goods, and wages went down. Inflation is still running hotter any time in the last 30 years.

That’s what you and I see, but that’s not the whole story.

Upstream of consumer prices is producer price inflation (PPI), which measures the costs of commodities required to produce finished goods – everything from appliances and cars to furniture and clothes. We watch PPI because it indicates prices at a manufacturer level. When those rise, guess who gets stuck with a higher price tag? That’s right, we do.

The news isn't good on that front, either:

The Producer Price Index for final demand increased 0.7 percent in January, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today.

On an unadjusted basis, the index for final demand rose 6.0 percent for the 12 months ended January 2023.

Producer prices tend to be sticky. Companies tend to raise prices when costs force them to, but vastly prefer to leave prices higher until competition or demand destruction forces them to act.

Bill Smead, chief investment officer at Smead Capital Management, thinks that inflation is "stickier" than the Fed, Biden administration or Treasury Department are willing to admit:

The enthusiasm … right now is the hope that we’ll get a friendly Fed out of a soft landing, and we do not believe that is going to be the case…

We think the inflation is going to be far stickier and longer lasting — in fact, a decade because in the United States, we have incredibly favorable demographics.

Keep in mind that Smead's prediction only describes what could be possible over the next ten years.

Unfortunately, the situation is already getting worse right now, featuring yet another installment in the long cavalcade of Fed faux pas

Disappearing “disinflation”

Occasionally, the Bureau of Labor Statistics (BLS) will re-examine their data releases, then revise them if necessary.

In this case, that “disinflation” which earned so much attention recently is fading fast… Here’s Wolf Richter’s take on BLS revisions to December’s inflation numbers:

The revisions for the December month-to-month readings were all to the upside, including:

- Overall CPI (CPI-U), old -0.1%; new +0.1%. So there goes that.
- “Core CPI” (without food and energy), old +0.3%; new +0.4%
- Services CPI, old: +0.6%; new +0.7%. This is where nearly two-thirds of consumer spending goes. And it is red hot.

In addition, the readings for October and November were also revised up, taking a bite out of the “disinflation” scenario.

Disinflation means inflation, but easing rather than worsening inflation.

Can Fed Chairman Powell really say that a disinflationary process has begun? Maybe he was looking at the same wrong numbers as everyone else – even so, to continue making the claim, in the face of more accurate data?

That doesn’t make any sense.

Rather than moving the goalposts, it seems like the Fed is just insisting they scored a touchdown even though instant replay footage proves they’re wrong.

What’s next? Probably moving the goalposts…

We must “learn to live with 3-4% inflation”

For years, the Federal Reserve has maintained a targeted inflation rate of 2%. Maybe not for much longer.

Mohamed El-Erian, chairman of Gramercy Funds, recently told Bloomberg Television bad news about the Federal Reserve's historic inflation target:

It is very difficult to change a target when you have missed it for so long, the minute you do that your credibility is hit even harder. If people sat down today they would not come up with 2%, they would come up with 3% to 4%.

[He also hopes that] we learn to live with stable 3% to 4% inflation.

When inflation comes down, don’t be sure interest rates are going to come down as much as people got used to before 2022.

The end of cheap and easy money? No wonder tech companies have cut over 15,000 jobs a week since the beginning of the year alone.

If El-Erian is right, Wall Street will have a lot of trouble adjusting to assets based on their intrinsic, fundamental value.

That means asset prices would very likely tumble. Kenneth Rogoff, a former Fed economist, recently agreed with that assessment:

Higher real rates will mean lower asset prices in general.

Think about this for a minute.

This is an economist who worked for the Federal Reserve. (He’s also an author with an impressive body of research behind him.) He’s telling us the following:

“Higher real rates will mean lower asset prices in general.”

The more speculative, the riskier assets are, the farther and faster they’ll respond to higher interest rates. By “respond” I mean fall, plummet, plunge, decline, tumble and fall.

Just as absurdly low interest rates fuel a bubble, the return of even marginally reasonable interest rates pops the bubble.

Excuse me – I should say “disinflates” the market bubble.

I conclude that the next decade will be rough going for those of us seeking long-term financial security.

Here’s the bottom line: When times are crazy, “normal” plans probably aren’t enough.

Staying stable in volatile and uncertain times

There are a number of strategies to consider while planning your long-term financial stability (especially in retirement!) for a rough ride.

I’ll tell you this for free: hoping it will all return to normal isn’t one of them.

It might be a good time to consider the benefits of wealth preservation rather than growth. To borrow Mark Twain’s memorable turn of phrase:

I am more concerned about the return of my money than the return on my money.

He’s right! The more speculative and volatile any asset is, the more likely it is to go to zero -- and stay there.

For those concerned about “return of” your money, physical gold has proven to be a safe-haven store of value. Especially during longer periods of economic turmoil. For example, during the 1970s inflationary period and oil crisis, gold prices gained over 2,000% over the course of the decade.

That doesn’t mean the price of gold or silver will spike like that this time, but it’s still a possibility. It’s happened before.

That’s why investors consider both gold and silver as safe haven investments that hedge against economic chaos. If you think that kind of wealth preservation over time sounds like a good idea, perhaps it’s time to take a few minutes and learn even more.

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