Do you remember when Federal Reserve critics like Representative Ron Paul (R-TX) and contrarian investors like Peter Schiff warned about the tidal wave of inflation that would slam into the shores of the U.S.? Well, it looks like those prognostications are finally coming to fruition as recent data suggest price inflation is advancing, spooking financial markets midweek.
According to the Bureau of Labor Statistics (BLS), the consumer-price index (CPI) jumped 0.5% in January, the biggest increase in five months. A host of consumer prices increased last month: apparel, auto insurance, gasoline, healthcare, and rent, contributing to recent worries that inflation has irreversibly arrived and is finally rearing its ugly head.
The immense boost in consumer prices last month did not affect the year-on-year CPI, which remained unchanged at 2.1%, or the core rate of inflation, excluding food and energy, which was also flat at 1.8%.
U.S. stocks opened with triple-digit losses on Wednesday, but quickly pared those declines throughout the trading session. The market is preparing for the central bank to react by pricing in a March rate hike, as well as four more this year.
What are investors looking at? Let’s take a peek.
Crunching the Inflation Data
Americans may be witnessing bigger paychecks and bonuses, but it appears to be costing more to live.
Last month, consumers paid more for a wide array of goods and services:
- Food costs rose 0.2%.
- Gas prices climbed 5.7%.
- Hospital care increased 1.3%.
- Hourly wages swelled 0.8%.
- Rent was 0.3% higher.
- Transportation services ballooned 0.8%.
Moreover, consumers are experiencing some of the sharpest increases for specific items in many years. For instance, auto insurance soared 1.3%, the highest since 2001. Apparel prices surged 1.7%, the most significant increase since 1990 – this may have influenced the 0.3% dip in retail sales last month.
Overall, the significant boost in the core CPI brought the three-month annualized gain to 2.9%, the fastest pace in seven years.
Inflation has been on the rise since the economic collapse, but the recent acceleration should worry all.
Will the Fed Channel Paul Volcker?
After a substantial period of dormancy, inflation has emerged, causing traders to shake in their boots. Should it continue to seep into the rest of the economy, the Fed may be encouraged to aggressively pull the lever on several rate hikes, sending investors into bonds and bullion.
The scenario would be reminiscent of the late 1970s and early 1980s.
Towards the end of the President Jimmy Carter administration, inflation reached 15%, producing quite the situation for his successor, President Ronald Reagan. But the Fed implemented the necessary policies to reduce the inflation levels: raise rates. When Paul Volcker was given the keys to the Eccles Building, he jacked up the Fed Funds Rate to as high as 20%, which succeeded in fighting inflation and slashing it to 4% by the time Reagan departed the White House.
Could the same events unfold under new Fed Chair Jerome Powell?
In the aftermath of the Great Recession, the Fed not only blew numerous bubbles, but it also created about $3 trillion in new money. By monetizing U.S. debt, launching quantitative easing, and decreasing rates to historic lows, the Fed established a future of vast quantities of price inflation and a weaker greenback.
This creation of Federal Reserve Notes may now be heading into other pockets of the economy, not just Wall Street.
The market is already anticipating higher inflation, at least according to a Bank of America Merrill Lynch January survey of fund managers, which believe rising inflation and a crash in the bond market are the biggest threats in 2018. Plus, the latest inflation figures – and their subsequent fears – have given a handful of stock indexes the jitters.
Donald Trump Will Get the Blame
During the financial crisis a decade ago, then-President George W. Bush and the Republicans were blamed for the mess. But did they deserve the culpability? Not necessarily. Sure, Bush and Co. paid for two wars on a credit card, cut taxes without cutting spending, and bailed out corporations, but the primary culprit was the Fed.
Yes, the National Homeownership Strategy initiated by former President Bill Clinton and maintained by his successor, was one of the policy causes of the housing crash. But it was the Fed’s artificial credit expansion and low interest rates that fueled both the government and mortgage lenders.
In other words: if a bunch of second-graders are hyped up on sugar, running wild and destroying the furniture, who are you going to blame? The students or the teacher who provided the sugar?
In the end, when the next recession hits, which could be worse than what happened in 2007-2009, President Donald Trump will bear the brunt of it all. Since the media has already placed a bullseye on his back, attempting to blame him for everything, Trump, Republicans, and capitalism will be cast as the main villains in the boom-bust business cycle stage play. In reality, Ben Bernanke, Janet Yellen, and the Federal Reserve System should be the characters who are given the Final Curtain at the Eccles Building.
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