We Have Zombie Inflation

After the latest CPI report, the mainstream declared price inflation dead and put interest rate cuts back on the table. In this episode of the Money Metals' Midweek Memo, host Mike Maharrey breaks down the data and reveals that the eulogy might be premature. In fact, he thinks it's more likely we have zombie inflation that will never die.

Mike kicks off the show by talking about horror and action/adventure movies, pointing out that there is almost always a point near the end when you think the monster or bad guy is dead, but it isn't. It comes roaring back to life to inflict a little more mayhem. 

"Well, we’re in a horror movie called price inflation right now. The bad guy has been declared dead and buried, but I have a feeling he’s very much alive, just waiting to make that resurrection appearance. The only difference between this and the typical horror movie ending is the bad guy will never die! It’s zombie inflation!"

Mike points out that just a month or so ago, everybody was worried about sticky price inflation. They were lamenting that since prices were still rising, Fed rate cuts were off the table. 

"My, how things change! Now rate cuts are back on the table for September! What happened? Well, the April CPI report happened. Did it show a big turnaround in price inflation? Well, no. But it was just slightly better than expected and that was enough! It just goes to show how desperate people are for rate cuts."

But Mike argues that an objective reading of the data in context makes it clear that the price inflation monster the Federal Reserve and the U.S. government unleashed during the pandemic (and before) is alive and well.

He goes on to provide an overview of the April CPI data. 

"The goal is 2 percent. None of these numbers are close to that mythical 2 percent price inflation target. If you are totally a half-glass-full person, you can argue that the April numbers show a hint of cooling, but we’ve seen that before. Everybody was convinced prices were falling and inflation was beat late last summer. And then they weren’t. So, if we get more cooling reports in the next three or four months, I might concede the Fed is making some progress. Until then, this is nothing but hype and wishful thinking."

Mike notes that a really bad Producer Price Index report got completely lost in the euphoria of the CPI data.

"Producer prices are generally a leading indicator of price inflation because producers pass at least some of their rising costs on to consumers. So, yikes."

So, it's pretty clear price inflation is alive and well. And Mike says that fact isn't lost on the average person. He takes a little bunny trail and shares an amusing but revealing, and maybe a little surprising conversation he overheard at a gas station in Dothan, Alabama. 

"Anyway, back to the CPI story. Put in context, the April report provided very little good news for people struggling with rising prices. The only real positive is that the monthly rise wasn’t quite as bad as expected, and we finally got an overall CPI report that wasn’t worse than projected. But it was enough to reignite the rate cut hopes. As I put it in an article I wrote, the mainstream is looking at this CPI report through the lens of wishful thinking. Because man-o-man – they want rate cuts BAD!"

Mike concedes that the mainstream is right to want rate cuts. After all, the economy was loaded up with debt, bubbles, and malinvestments during the decades of easy money.

"The Fed mucked things up a long time ago. The recent rate hikes just exacerbated the problems caused by the decades of easy money. During that time, people loaded up with debt, all kinds of asset bubbles blew up, and there were a bajillion malinvestments in the economy. Hiking rates to 5.5 percent wasn’t enough to kill the inflation monster, but it will certainly cause things to snap in the cracked-out economy."

Mike goes on to explain that the Fed never did enough to slay the inflation monster because the central bankers knew they couldn't go all in and do what it would take. 

"Why do I say that it wasn’t enough? Well, just look at how much inflation they created. Remember, inflation is an expansion in the money supply. Rising prices are one symptom of monetary inflation. So, the Federal Reserve injected nearly $5 trillion of money created out of thin air during the pandemic. The U.S. government took a lot of that money in the form of “stimulus” and showered it on Americans who weren’t producing anything. That is the source of these rising prices. A few rate hikes and a modest reduction in the balance sheet weren’t nearly enough to unwind that massive monetary malfeasance – on top of the trillions in inflation they created during the Great Recession."

But Mike argues we will get rate cuts, whether inflation is dead or not. When the economy crashes, the central bank will do what it always does. It will slash rates to zero and launch quantitative easing. 

"It’s important to remember what rate cuts mean. It is a pivot back to inflationary policies that got us here in the first place. In fact, we’re already there. I’ve mentioned before that from a historical standpoint, monetary policy is still loose to this day. ... In other words, they are still creating inflation. And rate cuts mean they’ll be creating inflation even faster. So, anybody who tells you that the inflation monster is dead either doesn’t understand what’s going on or they’re lying. The monster might be beaten, bloodied, and bruised, but he’s just waiting to come back with a vengeance. You might call it zombie inflation. It never dies. It just keeps coming back."

Mike points out that you can't do anything to fix monetary policy. 

"But what you can do is protect your wealth from the constant devaluation courtesy of the Fed and the US government. Get gold. Get silver. As dollars become less valuable, the dollar price of real money rises."