The latest Consumer Price Index (CPI) numbers came in on May 12, 2021.  There were expectations that price inflation would pick up.  They were calling it “transitory”.  But the numbers came in much hotter than expected.

For the month of April, prices rose 0.8% from the previous month.  The year-over-year showed an increase of 4.2%, although that could be a bit misleading, as the country was mostly under lockdown in April 2020.

The CPI excluding food and energy came in even slightly higher, as it was up 0.9% from the previous month.

The more stable median CPI came in at just 0.2% from the previous month.  While I like looking at this figure as well, it is important to take it in context.  This means that half the consumer goods measured were at or below the 0.2% increase.  That’s the median.  But the overall CPI came in at 0.8%, which means some consumer goods are coming in much, much higher to push the weighted average higher.

If the consumer goods that are seeing significant price inflation are the goods that are more essential to the average person, then this makes a big difference.  For example, we know that the price of lumber has gone up in a big way.  This is adding tens of thousands of dollars to the cost of building a new house.  Meanwhile, if the price of new furniture stays the same, it isn’t the same thing.  Most people don’t need new furniture.

Either way, the average is probably more indicative of what people are actually experiencing.  I like looking at the median because it is less volatile, but the average is more meaningful over time.

This CPI numbers spooked a lot of people.  It likely spooked the members of the Federal Reserve the most.  The Fed has essentially gotten away with massive monetary inflation over the last 13 years with little consequence.  There has not been a corresponding increase in price inflation, especially when looking at the CPI statistics or the PCE measure that the Fed uses.

This inflation report comes right on the heels of a bad jobs report last week, where the unemployment rate went up.  We aren’t in the mode of 1970s stagflation yet, but if these numbers continue, we are headed that way.

While I don’t necessarily expect the monthly CPI numbers to keep coming in so high in the coming months, it isn’t impossible either.  An increase of 0.8% may not seem that high, but that is for one month.  If you annualize that, you get a rate of 9.6%.  If you annualize the CPI minus food and energy, it gets into the double digits.

What will the Fed do if we get a couple of more months similar to the one just reported?  Fed officials have insisted that we would see its target rate remain near zero for the foreseeable future.  The Fed has also continued to expand its balance sheet by about $120 billion per month.  This is after the massive jump of almost $3 trillion in March through May of 2020.

Will the Fed be forced to save the dollar and gain control of price inflation by stopping its balance sheet expansion?  Will it have to take even more drastic measures and reduce it?

If and when the Fed does react to increased inflation fears, what will happen to the markets?  What will happen to the federal government’s spending?  Who will buy all of the debt that is continually growing?  I don’t think China and Japan will be major buyers, or at least not at low interest rates.  And if rates are pushed much higher, then the interest payments on the national debt will start to grow, thus perpetuating the situation.

Market Reaction

There was a major sell-off on Wall Street.  The Dow dropped 681 points.  The S&P 500 and Nasdaq were both down over 2%.

Almost everything was down, including cryptocurrencies and gold.

You may wonder why gold went down in price a bit, given that it is supposed to be an inflation hedge.  The reason is because the market fears that the Fed will have to stop its ultra loose monetary policy earlier than expected.  This is really the reason that most everything went down.

This just shows that the major boom in the stock market that we have seen is a result of Federal Reserve monetary inflation.  When the government hands out tons of “free” money, which is delivered through money creation instead of taxation, then it isn’t surprising when asset prices get bid up.

Many people have enjoyed the ride, with all of these speculative assets going through the roof.  But it is obviously unsustainable.  When you think that most of the country was shut down last year, and tens of thousands (or hundreds of thousands) of small businesses closed permanently, and millions were thrown out of work, does it really make sense that the stock market has returned something like 40% over that time?

It is also interesting that Bitcoin and some other cryptos got hammered with this news.  Bitcoin was sold to people as the anti-dollar.  Its appeal is supposedly that it can’t be inflated like the U.S. dollar.  So when it is reported that the dollar is being depreciated even faster than before, why did Bitcoin sell off so much?

I think it is because Bitcoin is not an inflation hedge against the dollar or anything else.  It is a speculative “investment” that has been bid up with all of the free money going around.  With fears that the Fed might have to curtail its monetary inflation, Bitcoin suffered like most everything else, except even more dramatically.  Bitcoin and all of the other cyrptos are held up by loose money from the Fed, which seems kind of ironic given what we have been told.

I am not predicting that this is the start of a new bear market.  It’s quite possible that things will settle down, and it is possible that the bull market could resume.

But despite the bad news for the market, it is a little refreshing for those of us who have been warning that this is one giant speculative bubble that is unsustainable.

The “everything bubble” is dependent on Fed easy money.  As soon as there is a threat that the easy money will be pulled away, it can collapse the whole house of cards.

Now we get to wait another month for the next round of CPI numbers.  We’ll see if the bubble can keep going in the meantime, or if investors just got hit with a dose of reality.