A Day Of Inflation

A few weeks ago in Taking Stock I focused on a silver lining in world asset price declines. It signaled relief from final inflation entering the pipeline.

This morning a tiny sliver of it emerged from the other end. The BLS reported slightly better than expected October CPI up 3.2% over October of last year. In a typical fit of irony, markets responded by putting a fresh impulse of inflation in. The narrative is that the Fed has less inflation fighting work to do than it would have if the reading came out higher, that is, that the policy outlook is incrementally easier than it was yesterday. So stock and bond prices took flight.

The dollar was down.

Not only against foreign currencies (an over 1% loss), but against bonds and stocks. Also elementary commodities such as copper, gold, silver and platinum. It’s reported for example that platinum is “up” 2.62% as of this writing. But that’s only in dollar terms … wouldn’t it be at least as accurate to say the dollar is down in terms of platinum? Even more so, unless one can come up with a cogent explanation of how a government data release and anticipated action by the issuer of the dollar, the Federal Reserve, could possibly affect the intrinsic value of a chunk of inert metal?

As a reminder, one of our pet themes at Financology is that inflation is first evident in asset prices, later in consumer prices. The logic is simple: Total purchasing power of all the world’s stores of value is equal to the total body of stuff available for purchase. Take a moment to consider this statement. If it is not immediately obvious. It is a virtual tautology, true by definition, the logical equivalent of A=A. Yet conventional economics fails to even notice it. Securities, in the broadest sense – currencies, bonds, stocks – all represent claims on goods and services. The sum total of their purchasing power is unchanged by changes in their relative value. Why? Because it must.

Today the sum total of the purchasing power of all the world’s bonds, stocks, euros, pounds, yen, etcetera increased relative to dollars by some 1%-3%. But the number of loaves of bread, gallons of gasoline, hours of plumbers, electricians, doctors, truckers, homes, acres of farmland, did not. The inevitable conclusion is that the total purchasing power of the rest – dollars – decreased.

The proportions of the total aren’t actual data, but the following chart illustrates the concept. An increase in the share of purchasing power of any one or group of assets must necessarily represent a decrease in the remainder.


I hope it’s obvious that unlike most of economic thought, this is not a statistical argument. It is logic from first principles. Yet as it must be, it is also evidenced in empirical observation. The great asset price increases of the fifties and sixties were followed by great goods and services price increases in the seventies. The great asset price increases of the teens are now being echoed in goods and services price increases in the twenties. They were all the same thing … depreciation of the pricing unit.

Why don’t these changes in currency value immediately register in consumer prices? Why are there lags extending from days to weeks to months and years? Securities trade in real time auction markets and adjust instantly in real time. They’re also used to store value. And people use non-currency assets like bonds and stocks for longer term storage, and must covert them into currencies in order to exercise the purchasing power stored therein. So declines in currency values registered in the securities markets take time to work their way into consumer prices. And because economists and policymakers as a whole are myopically obsessed with goods and services prices, pretending asset prices live outside of the world of inflation, they remain chronically behind the curve.

Since late July we’ve seen the aggregate purchasing power of bonds and stocks and foreign currencies decline, meaning that the purchasing power stored in dollars rose. Today, we saw a just a bit of that show up in the latest consumer price data, admixed with earlier losses already in the pipeline. But today’s market reaction represents a decline in dollar value destined to be reflected in tomorrow’s lagging final inflation reports.

There is only one possible alternative. And that is that it’s reversed before the pig has made its way through the snake. We can confidently predict that either the asset price gains will stop or consumer inflation will be resurgent.

For now, the financial media are celebrating this development, making a value judgment that this is a Good Thing. As if we are all suddenly 1%-3% richer, because inflation is being brought to heel and asset prices have risen. But make no mistake.

It’s just a day of inflation.

13 thoughts on “A Day Of Inflation

  1. Bill Terrell says:

    The combination of favorable seasonals and a completed inverse head and shoulder pattern in VT suggests further rally potential in stocks, albeit at a less breakneck pace, for the remainder of the year. This is further supported by today’s broad participation, where small stocks actually left the teracap techs in the dust, with the Russell 2000 up a smashing 5.49% versus the Mag 7 at 2.30%. Until the inflation feeds through to consumer prices, asset prices are free to rise unconstrained. After that the picture grows more tempered, as the inflationary impulse matures and the specter of further rate hikes resurfaces or the paint finally dries on the Fed’s shrinking balance sheet. Until shown otherwise, the broader bear market remains in effect; at this point a more volatile 2024 Q1 looks likely.

    Bonds have completed a full five waves down in Elliott Wave terms. That implies substantial further upside after this grizzly bear market. While bonds and stocks have remained highly correlated longer than I have expected, a decoupling will still be necessary to complete the cycle.

  2. jk says:

    according to the bls, health care costs are currently no higher than 2018. if you believe that then there’s a bridge i’d like to sell you.

    1. Bill Terrell says:

      Haha that would be hilarious if it weren’t true. Wolf Richter reported a similar statistic for used cars a while back … net no inflation in the CPI from that category for years.

      There’s never just one cockroach. You can be sure there’s more where these came from.

  3. Mega says:

    From Flagship nation to 3rd world dishonest twisting assh0les……in my life time.
    Sad, i still remember Nixon coming off the Gold standard as a child.

    ……….its all down to China.
    Will they bale them out as 2008?

    1. Bill Terrell says:

      It’s been mostly decline since the JFK assassination. But it’s accelerated since 2000, then even more so since 2020. It reminds me of that line from The Sun Also Rises … the reply to how did you go bankrupt? Gradually … then suddenly.

      I remember my dad stocking up on gold and silver in the seventies. Even socking away freeze dried food. We got a reprieve in the eighties and nineties, but it’s been all downhill since.

      The closing of the gold window was definitely a milestone, but it’s not as well remembered that the circumstances that led to it had been developing for years. The sixties “guns ‘n butter” deficits laid the fiscal foundation. Still, the solution was to change the policies that caused the problem, not just remove the impediments to more of the same. Johnson ran up the tab; Nixon, Burns and Connally sold us out.

      The seventies inflation prompted the indexing of Social Security benefits to the CPI. Once that happened, you could almost predict the next move would be to deem the CPI to overstate “inflation” and start looking for ways to dumb it down.

  4. Mega says:

    Biden was a horror when he met Xi………….think China will NOT be bale them out
    2024 will be a blood bath

    1. Finster says:

      Yeah even Blinken blanched. The question was obviously a cheap trap to make news, and Biden stepped right in it.

    1. Finster says:

      Government of the corporations, by the corporations, for the corporations.