Inflation And The Difficulty Of Numbers

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To investors,

The President of the United States gave a speech on inflation yesterday. He described the abnormally high inflation environment as his top domestic concern. While that would seem like a worthy focus of government officials, this acknowledgement of the problem was quickly followed with ridiculous gaslighting.

According to the President, the two main causes of high inflation are the once-in-a-century pandemic” and Russia’s invasion of Ukraine. There is no doubt that these two events are partially to blame, but it was quite shocking to see no mention of the undisciplined monetary and fiscal policy from central bankers and politicians over the last two years. Identifying the problem, while simultaneously refusing to accept any responsibility, is what adults expect from their pre-puberty children, not the President and his administration.

This wasn’t even the worse part though.

President Biden went on to share that his plan is to ask corporations to refrain from price gouging, along with increasing taxes on corporations and the wealthiest Americans. I honestly had to double-check to make sure I heard this correctly. If the plan to curb inflation is essentially chasing a boogey man of price gouging, while also increasing the costs for businesses through taxation, then we are all screwed.

Now here is the interesting thing though — I don’t think this is a Republican or Democrat thing. I don’t even necessarily believe that it matters who the President of the United States is. The incentive system in our country is for politicians to constantly mitigate short-term pain at the expense of any potential long-term consequences.

Understanding this small detail will help make the current situation easier to comprehend. Here I am on May 13, 2020 talking about this exact phenomenon:

Pomp 🌪 @APompliano

May 13, 2020. You can't intervene in markets, manipulate interest rates to 0%, and print trillions of dollars without long-term issues.

May 11th 2022

So how are we doing with the long term impact of those short-term decisions?

The CPI data released this morning has pinned inflation at 8.3% and there are numerous reasons to believe that this metric is significantly underestimating the problem. First, the breakdown of various goods is crazy to see:

Charlie Bilello @charliebilello

Price increases over last year (CPI report) Gasoline: +43.6% Used Cars: +22.7% Gas Utilities: +22.7% Meats/Fish/Eggs: +14.3% New Cars: +13.2% Electricity: +11.0% Food at home: +10.8% Transportation: +8.5% Overall CPI: +8.3% Food away from home: +7.2% Apparel: +5.4% Shelter: +5.1%

May 11th 2022

442 Retweets946 Likes

Gasoline is up 43% year-over-year and food at home is up nearly 11%. This is completely unsustainable for the average American family. But did you see that shelter is up 5% according to the CPI? That seems odd given that report after report is showing that both rent prices and real estate prices have increased closer to 20% year-over-year across the country. Hard to imagine that rent and real estate is up 20% and shelter is only up 5%.

But that isn’t the only issue with these numbers. There is a significant reason to believe that the metrics and calculations are actively being manipulated to show lower CPI numbers in real-time.

Pomp 🌪 @APompliano

The government is manipulating economic calculations during the highest inflationary period in 40 years. This is why no one believes the CPI number.

zerohedge @zerohedge

Tomorrow's CPI report will include a methodology change to new vehicle prices, switching to an alternative series based on JDPower data.

May 11th 2022

170 Retweets920 Likes

Not exactly an ideal situation, especially because the people who are hurt the most end up being the most financially vulnerable in our society.

This isn’t the end of the story though — the Wall Street Journal recently published an article on the 477 employees at the Bureau of Labor Statistics who are tasked with walking into physical stores to write down the price of various goods. It is WILD to think that we are using humans and manual data entry to track inflation in the 21st century.

This paragraph in the article stuck out to me:

“The job of a price-checker is exacting. To price an item, workers go through an up to 11-page list of data points to make sure they are pricing the same item they did the prior month. A can of soup has 12 different specifications, including flavor, size, brand, organic labeling, material of the packaging and dietary features, such as sodium content.”

So here we find ourselves with 8.3% inflation, an annualized GDP contraction of -1.4% in Q1, and a market that expects 10 total interest rate hikes before year end - culminating in a 3.0% interest rate. Hello, Mr Recession.

The last thing I want to cover today is a potential solution — unfortunately I don’t think the Federal Reserve or other central banks have many options. If they don’t act, inflation continues to worsen. If they aggressively act, inflation will come down but the recession will be nasty. Maybe the only potential solution is to do the minimum potential action to steer the market back towards a normal environment, while trying to avoid the recession.

Unfortunately, it seems nearly impossible for even the most skilled central banker to navigate this complexity. We are likely going to endure high-ish inflation and a recession at the same time. This won’t be fun. All investors can really do is either (a) sit on their hands and wait, or (b) hope they have cash on the sidelines ready to deploy as we seem more blood in the streets.

Stay safe out there my friends. I’ll talk to you tomorrow.

-Pomp

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