We're In The Eye Of The Inflation Hurricane

Markets have rallied since we got cooler-than-expected CPI data for October. But in his podcast, Peter Schiff said we are in the eye of the inflation hurricane, and investors have been lulled into a false sense of security.

On Tuesday (Nov. 15) producer price data came out, and like CPI, it was below expectations. PPI was up just 0.2% versus expectations of a 0.4% increase. Core PPI charted no monthly increase in October.

Now, of course, all of these are still strong numbers, with the exception of the x-food and energy month-over-month, which was flat. But just looking at the increases, we still have a big inflation problem even if these numbers seem to indicate that the inflation problem is going away. It's not."

Nevertheless, the markets are keying in on this data. The fact that PPI came in under projections feeds into the perception that inflation is cooling. That has led to a broad stock market rally due to the expectation that cooling inflation will give the Federal Reserve cover to pivot and ease off of its monetary tightening.

But Peter said any apparent progress that the Fed has made in its inflation fight is only temporary.

It will not last."

He said one way you know this is the fact that the dollar has tanked since the CPI data release. The dollar index has declined by about 8% since its highs eight weeks ago.

Here is the irony of what's going on. The more it looks like the Federal Reserve is making progress on bringing inflation back down, the weaker the US dollar gets. It's the weak US dollar that's going to be instrumental in raising the inflation rate back up. So, in other words, the Fed is the victim of its own success. Even though it's not real success, to the extent that the market perceives that there is success, that is sowing the seeds of failure."

Peter has been arguing that the relative strength of the dollar has kept prices from rising even higher. A strong dollar holds down import costs. Europeans experienced the flip side of the equation. Euro weakness exacerbated rising prices.

Now that the tables have turned and the dollar is now falling, now we're going to have to get a taste of our own medicine. We're going to start seeing this impact our consumer prices."

Peter emphasized that this won't happen right away. There will be a bit of a lag.

But by some point — maybe early to mid-2023 — the weaker dollar is going to start to show up in higher consumer prices. Number one, it's going to immediately increase our import bill because now we're going to have to pay a lot more to import those products. It's also going to increase the cost of transporting those products to the United States because the weaker dollar is going to drive up both fuel costs and other shipping rates."

This will also impact GDP. Keep in mind the only reason we had GDP growth in Q3 was due to the shrinking trade deficit. That already appears to have reversed.

Once the dollar really starts to fall, that process gets reversed when it comes to cheaper imports. We're going to have to be paying through the nose for those imports, and that is going to subtract from GDP. But it's also going to exert more downward pressure on the economy because of the upward pressure on consumer prices."

Peter brought up the surging level of household debt. Thanks to rapidly increasing mortgage costs and credit card use, total household debt grew at the fastest rate in 15 years during the third quarter. Peter said this is a sign that the Fed is not winning the war on inflation.

You can't fight inflation if consumers keep going more into debt to buy stuff. Because that means that prices are going to keep rising because the demand is still there. Consumers are just making up for their loss in real income by going into debt. They're not cutting back their spending. They're borrowing so they can keep spending."

The Fed has to raise interest rates high enough so that people stop borrowing and stop spending and save instead.

What this proves is the Fed is losing the fight against inflation. The people who are paying attention to the noise of the Consumer Price Index or the Producer Price Index don't even understand inflation. They have no idea where it came from. They have no idea why it's so bad. And now they think it's going to come down. They're going to be completely shocked when inflation hits new highs."