Economist Warns: We’re Entering an Inflation Super-Cycle

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September CPI came in above expectations. At this point, even the central bankers at the Federal Reserve are having a hard time sticking to the “transitory inflation” narrative.

In his podcast, Peter Schiff talked about the CPI report. He said it reveals that we’re entering an inflation super-cycle and perhaps the markets are starting to figure this out.

Peter called this the “government report card on inflation,” noting that it’s not particularly reliable because the government is grading itself.

“After all, the government is creating inflation through the Federal Reserve, and then the government is reporting that inflation to the public itself. So, it’s kind of like if kids were able to write up their own report cards, kind of grade themselves, and then present their self-grading to their parents to review their schoolwork. Obviously, parents might take such a report card with a grain of salt if they knew that their kids prepared it themselves.”

The government is creating a lot of inflation, but the last thing they want the public to know is that there really is inflation. That would mean they might have to do something about it. The pretense that there isn’t enough inflation is what allows the Federal Reserve to get away with its loose monetary policy.

“So again, take these government numbers with a grain of salt, or at least recognize that whatever the number is the actual numbers are much higher.”

And keep in mind the methodology to derive CPI was deliberately designed to understate the true increase in the cost of living.

Even so, the CPI numbers reveal that inflation is still running hotter than projected. The expectation was for a 0.3% month-on-month gain. The actual number came in at 0.4%. That pushed the yearly gain to 5.4%. It was the fifth consecutive month with year-over-year CPI gains exceeding 5%.

If you annualized the CPI through the first three quarters of 2021, you come up with a 6% inflation rate.

According to the government numbers, housing costs increased in September, but owner’s equivalent rent (the method used to calculate rental costs in the CPI) is still only 2.9%. The actual cost of renting an apartment or home far exceeds this number. Owner’s equivalent rent makes up 23% of the CPI number.

“If you substituted actual rent for owner’s equivalent rent and then you calculated the annualized gain for the CPI for 2021, instead of being 6%, it would be 8%. So, clearly, 8% is a more accurate representation because it would include real rents instead of make-believe rents.”

Peter said that’s not the only fraud in the government data.

“So, I think the reality that Americans are facing when they shop is year-over-year inflation rates, or annualized inflation rates, north of 10%. So, we really have double-digit inflation if the government were accurately reporting it.”

In fact, if we used the CPI calculation that was in effect in the 1970s, it would show double-digit inflation.

Once again, gold initially sold off on the hotter than expected inflation data.


“Whenever there is hotter than expected inflation, the market reacts by selling gold, because they expect the Fed to put out that fire. So, it’s always bearish for gold, paradoxically, when we get bad inflation data, because the markets think that the Fed is going to do something about that bad data and that doing something will be bearish for gold because they’re going to fight inflation. They’re going to raise rates. They’re going to kick inflation’s butt. And therefore, people are selling gold in anticipation of this successful battle against inflation.”

This doesn’t make sense. Peter has consistently said the Fed will never wage a successful war against inflation.

“If it even tried, it would have to surrender. It would lose. It’s probably just not even going to enter the ring. And inflation will just win the fight by default.”

Even entering the fight would do substantial damage to the economy and the financial markets.

But this time around, gold did something different. After that initial knee-jerk reaction, gold rallied. As of Thursday morning, it was just above $1,800 an ounce.

“I think the fact that you know saw traders buying the dip on worse than expected inflation news maybe means this fantasy that bad inflation numbers are also bad for gold is now over. Maybe investors are realizing that bad news on inflation is actually good news for gold.”

Even if the Fed does tighten, we’re only talking about raising nominal rates. Real rates will stay negative. We have 6% annualized inflation, even using the government’s numbers. That means interest rates need to rise to 6% just to drive real interest rates to zero.

“Negative real rates are going to be with us indefinitely. And in fact, they’re probably going to get even more negative, even when the Fed eventually increases the nominal rates, I think they will do so at a rate that is slower than the acceleration in the rate of inflation.”

In other words, any tiny rate hikes the Fed initiates will be too small to have any real effect on the inflation curve.

Interestingly, bond yields on the long end of the curve fell on the hotter than expected inflation news.

“Maybe traders are figuring out again that even if the Fed does taper or does raise rates to fight off non-transitory, worse than expected inflation, that the fight won’t last very long. Because in fighting inflation, the Fed will end up undermining what’s left of the recovery and bringing about a recession, and that is why bond prices are rising and rates are falling  —  because the markets are looking beyond the rate hikes to the inevitable rate cuts. Any tightening policy sows the seeds for the next easing. And of course, every successive ease has to be bigger than the one before because of the tolerance we build up in the economy. We’re a much bigger drug addict. Every time the Fed juices the economy with monetary heroin, we have bigger and bigger problems, bigger and bigger bubbles that need to be sustained, and it requires an ever-larger dose.”

Perhaps investors are starting to look past the inflation fight to the inflation surrender — and now they’re buying gold.

“If this is the case, if gold is now going to go up, if silver is now going to go up on bad inflation news, then this rally has a long way to go. In fact, gold and silver have a long way to go to catch up to where they should have been had people been buying gold on bad inflation news all along.”

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