The BLS reported this morning that August CPI rose by 0.6% over July, and 3.7% over last August. The former figure is seasonally adjusted. The latter figure compares with the 3.2% year-over-year increase reported in July and 3.0% reported in June.
From 3.0 to 3.2 to 3.7 isn’t an encouraging trend. But it’s not a surprising one either, given we’ve been anticipating accelerating CPI, for instance in CPI Hijinks.
Our analysis there focused on a technical aspect of yoy reporting. We showed that yoy figures would be expected to rise even if the monthly rate remained fixed at 0.25%. The table shows an extrapolated August rate of 3.53% based on this fixed monthly rate.
But the increases we’re seeing go even beyond that, as we also anticipated, most recently in CPI Rises. Consumer inflation has actually bottomed out and is heading higher. This is a serious departure from the media script, which says that the Fed has hiked rates aggressively enough to subdue it. This in turn means a more dovish Fed going forward and a bullish omen for stock prices.
What are they missing? The connection between asset price inflation and consumer price inflation. The former leads the latter. Asset price inflation turned higher last fall and consumer price inflation now follows suit. This echoes the prior sequence wherein asset price inflation first rocketed higher along with the explosive monetary inflation beginning in March 2020, with consumer price inflation following in 2021-2022.
How much of this media blindness is innocent and how much is willful is hard to say. The lags between asset and consumer price trends are long and variable, so connecting the dots isn’t mere child’s play. On the other hand, it would destroy the narrative we just cited: Victory over consumer inflation -> dovish Fed -> bullish for stocks doesn’t work if rising stock prices -> rising consumer prices. Wall Street is in the business of selling stocks and this doesn’t exactly make a great sales pitch.
Long time readers know I rely on first principles first, empirical data second, so that mere statistical association carries little weight on its own. The first principle is that asset and consumer price inflation are at root both reflections of the same underlying phenomenon, a depreciating currency. As the units of account lose value, it takes more of them to buy the same stuff. Prices rise. But not at the same time … assets respond instantly because they trade in real time, tick-by-tick auction markets. Consumer goods and services don’t, incorporating a lengthy chain of inputs.
Assets are also used to store value for later use and can consequently also serve as a reservoir in which the price effects of inflation accumulate before they start to spill over into consumer prices. But all value stored in assets is eventually used to buy stuff with, so there is no planet on which asset price inflation continues indefinitely without ultimately finding its way into consumer prices.
The how long for part is where it gets complicated. The best I can do there is fall back on empirical observation, and note that after the long asset price inflation of the 2010s, the 2020-2022 experience suggests the reservoir is now full. And we’re seeing that confirmed as the next wave of asset price inflation overflows into consumer price inflation within months.
But the Fed has embarked on one of the most aggressive rate hiking campaigns in memory. What’s the hangup?
Again, this turns on unjustified assumptions and tunnel vision. What requires the value of the currency to depend solely on the Fed funds rate target? Nothing. The size of the Fed’s balance sheet is at least one other factor. And aggressive as the Fed’s rate hikes may have been, the trimming of the balance sheet has been lackadaisical, dream-like. For a deep dive into this issue, check out John Hussman’s take in Central Bankers Wandering in the Woods.
Sorry Wall Street. Stock prices have to take another leg down or consumer prices another leg up.