This morning’s July CPI release showed a year-over-year increase of 3.2%. This is an acceleration from last month’s 3.0% increase.
It comes as no surprise to Financology readers. We have been insisting the benign trend in CPI inflation was in peril ever since stock price inflation roared back late last year, specifically asserting Inflation Is Back this January. We warned the Fed was making a “clear policy mistake” last December. It should come as no surprise to Jay Powell either, given that he repeatedly emphasized last year the link between “financial conditions” and final inflation. On at least one occasion, he even appeared to deliberately squelch a stock rally.
The minutes of the December meeting indicated participants fretted that stepping down from 75 bp to 50 bp hikes might spark a rally in stock prices, easing financial conditions and kneecapping the Fed’s hard won progress on quelling inflation. That’s exactly what happened. But the Fed hasn’t looked back, apparently having forgotten its concern that reflating stock prices might ultimately reflate consumer prices.
Well … here we are.
More recently we also called out a technical issue with base effects that would let us to pinpoint last month’s YOY CPI as the year’s likely low in CPI Hijinks. To this add the declining dollar, renewed stock price inflation and resurgent commodity price inflation and you have the ingredients for a flammable inflationary cocktail.
So this, unfortunately, is not a one-off. Consumer price inflation is roaring back to life just as Wall Street was rushing to dance on its grave.
What next? It couldn’t be clearer. YOY CPI readings continue to rise from their June 2023 nadir. The only way that will stop is renewed dollar strength as indicated by falling stock prices. Though the lags may be long and variable, there is no planet on which stock price inflation can continue at a double digit annual rate without consumer price inflation eventually following suit. They both ultimately reflect the same underlying reality: depreciation in the value of the currency. Stocks, which reprice in real time, tick by tick, respond instantly. Consumer prices, which don’t, simply take longer. That two different manifestations of the same underlying phenomenon could go their separate ways indefinitely is magical thinking, facilitated by the lag.
Yet the same mistake is made over and over. Early in September of 2008, I posted on iTulip “4-3-2-1 Deflation!”. I said deflation had been in progress for two months and that unless imminently reversed, it would soon be reflected in consumer prices. I took a lot of guff for it at first, but only a couple weeks later Lehman Bros collapsed. Soon there were outright declines in the CPI. Following the Fed’s explosive monetary fireworks of 2020-2021, we said rising stock prices would lead to rising consumer prices. They did.
And here we are again.
July YOY PPI, released this morning, also showed an acceleration over June; from 0.2% last month to 0.8% this month. PPI is normally more volatile than CPI, but like CPI, is also a lagging indicator of inflation.