The numbers are in, and inflation is booming. Both the PPI (Producer Price Index) and CPI (Consumer Price Index) grew twice as much as projected for September 2022, currently sitting at 8.5% and 8.2%. The 2023 COLA (cost of living adjustment) for Social Security recipients was released this morning at 8.7%, the highest COLA since 1981. The average retiree will see an extra $144 added to their monthly check, beginning in January. While both the PPI and CPI are lower than the previous month, they remain stubbornly high in spite of recent interest rate increases. DOW futures initially dropped 500 points on the news, with precious metals down slightly. A review of charts provided by Patrick Karim indicates that gold often bottoms when the CPI begins to come down. CPI is now marginally lower for the third month in a row, signaling gold’s next move upward is likely near.
What Does It All Mean?
Inflation today is uncomfortably sticky, and seems poised to last longer than many prefer. Part of the reason it has not responded more quickly to the fastest interest rate increases in history, is due to the type of inflation it is. Sometimes inflation is due to an overheating economy accompanied by increased demand for goods and services. That type of inflation responds more quickly to interest rate increases, which tend to slow spending. But in this case, inflation is more about supply shortages and an overstretched workforce. Higher interest rates in this environment don’t do much to reduce supply shortages, and make life more expensive for those seeking necessities. Savings rates are down and credit card debt is up here in America, as wage increases have been outpaced by inflation since 2021. Discretionary spending is under pressure, as are corporate profits.
Higher Energy and Food Costs
Everyone needs to eat and use energy. Those trying to save money by cooking at home have seen groceries increase by 13% over the last year. Electricity is up 15.5%, gasoline is up 18.2%, natural gas is up 33%, and heating oil is already 58% higher than last year. While these numbers are much lower than what many are experiencing in Europe, they are higher than many Americans (especially those born after 1981) have ever experienced. These conditions can also lead to an unfavorable stock market, for a longer period than many care to remember. During similar periods from 1929-2000, it took 15-30 years on an inflation-adjusted basis for stocks to break even from previous highs, unlike the 3-6 months in more recent history. Precious metals are likely to reach new heights more quickly from here, if past is prologue.
CPI vs PPI
Even though the PPI and CPI numbers are related and reported at nearly the same time, there are differences between the two. The weighting of various data inputs that go into the PPI calculation can be updated every 5 years, versus every 2 years for the CPI. This means that the CPI can be changed more frequently to reflect changes in the economy, whereas the PPI is slower to respond. The PPI is calculated from data collected on a single day each month, whereas the CPI is calculated from data collected and averaged throughout the month. Many believe that the CPI data does not fully account for all the inflation experienced by the average consumer. Even the Bureau of Labor Statistics admits this, when discussing the geometric calculation method used to calculate the CPI. “The geometric calculation reduces substitution bias, leading to lower measures of inflation in periods of price increases.”
If the official CPI calculations produce “…lower measures of inflation in periods of price increases”, what would more representative measures of inflation look like? John Williams of Shadow Stats provides inflation measurements using the calculation methods used for official CPI calculations in the 1980’s and 90’s. Using 1980 calculations reveals an inflation rate of 16-17%, which is double the current “official” CPI of 8.2%. Part of the reason for this divergence is the weighting given to various cost inputs in current CPI calculations. Common expenses such as food (+11.2%), fuel (+19%), and utilities (+20%) are given a low weighting in current calculations, to help “…lower measures of inflation (CPI) in periods of price increases.” Unfortunately, consumers are impacted by the actual price increases, rather than the artificially reduced CPI increase.
Where Do We Go From Here?
While it is encouraging to see YOY (year over year) inflation numbers lower for the 3rd month in a row, many components of the CPI and PPI are actually higher, which explains why the MOM (month over month) numbers are growing twice as fast as expected. No matter how we slice it, inflationary pressures and higher interest rates appear here to stay for now. “For now” is the operative phrase, as some have described the Federal Reserve plan to “…raise interest rates until something breaks”. When we consider possibly being on the precipice of WW3, with bond markets and pension plans worldwide at the brink of implosion, it is possible something breaks sooner rather than later. The question then becomes, what’s next? Perhaps the best answer is, no one knows for sure, but there will likely be more money printing involved.
If you will receive the 8.7% COLA increase next year, congratulations. Nothing like that has happened for over 40 years. For more consistent help in dealing with inflation, we have to consider allocating part of our resources to gold and silver. Whether interest rates stay high for an extended time dealing with this stubborn inflation, or something breaks and rates are lowered quickly, inflation is here to stay for the foreseeable future. Until our manufacturing base is rebuilt here in the United States, our ability to reduce the costs of goods and services purchased elsewhere is limited. When the world overwhelmingly traded with dollars, it wasn’t that impactful. But when the world increasingly prefers hard assets over paper dollars as payment for trade, o/news/falling-dollars-rising-gold to protect our savings becomes more important than ever.