Looking at Consumer Price Indexes

Stocks and bonds rallied this week on the hope that the decline in the latest year-over-year CPI numbers from 7.1% to 6.5% in December will mark the beginning of a return to a sub 2% CPI and a return to a promiscuous monetary policy that will allow eternal material bliss for those already so wealthy they don’t know what to do with all their money. But with Bitcoin up 17.12% this week, I’m wondering if that kind of increase in a week might not tell Jay Powell to stick to 50 or 75 bp increases? 

David Stockman is having none of that optimistic thinking about inflation. He sent out the chart on your right that shows what the Fed calls “the sticky” Price index (purple line left axis) as opposed to the flexible consumer price index (black line right axis). The “sticky price” represents consumer prices less food and energy. Energy prices are especially volatile. The establishment likes to highlight the sticky price when food and energy prices are rising, but not so much when the sticky prices are rising and when food and energy are in decline. It was mostly the decline in energy prices that led to the year-over-year decline in the CPI.

To point out how much more of a problem “sticky” or systemic inflation is than as suggested by the latest 6.5% print, David smoothed out the impact of volatile food and energy prices on the CPI by annualizing the rate over a two-year period. On January 2021 that two-year stacked rate was 1.9%. It gradually grew from there, constantly to a high of 7.2% in June then a very gradual decline to 6.8% in December, rather than the 6.5% handle reported for December in a one-year rolling number. So, when the impact of volatile food and energy prices are smoothed out over two years, you can see from the chart above on your right that inflation is much more of a systemic problem than the one-year statistic suggests in the chart above left. 

So, over the last 12 months, the sharp drop in energy prices has allowed Mr. Biden to claim his omnipotence in bringing the CPI down. However, for several reasons there is no reason to think energy prices will fall much further than their recent declines. First there was the Biden drawdown of our strategic petroleum reserves to suppress surging oil prices to improve Democrat election prospects last November. Also helping to keep a lid on energy prices was the Zero Covid policy of the Chinese. But now, Biden has to refill the strategic oil reserve, which means withdrawing it from the markets at the same time China has suddenly done a 180-degree turn to fully open its economy from the previous national lockdown. On top of that, demands for fuel are just now starting to rise dramatically as the weather gets really cold now in Europe, while Biden’s self-defeating anti-Russia sanctions are likely to combine to increase demand and reduce supplies as the war in Ukraine wages on. And don’t forget that the gulf oil producers are now on the Russian-China anti-U.S. dollar team. Between Saudi-Arabia, Iran, and Russia, there is a new oil cartel that is openly engaged in replacing the old petro-dollar monetary regime with a petro-yuan system.

Of course, that is not to say we won’t see some downward pressure on the CPI. There can be no denying that as the Fed continues to pull dollars out of the system and we head into a recession there will be downward pressure on prices overall, even if geopolitically related supply issues for food and energy lead to upward pressure on prices for those commodities. The chart on your right shows the impact of declining M-2 money supply on the CPI with a 16-month lag. But to the extent energy prices rise due to geopolitical changes, it will put even more pressure on the Fed pivot toward QE. And with regard to pressures to pivot, it should be noted that despite wages continuing to rise, inflation adjusted wages have now continued to decline for 21 straight months! Perhaps the handwriting for a Fed pivot is on the wall no matter what Jay Powell says. Perhaps that’s why virtually everything was up this week and why gold is breaking out to over $1,900 for the first time in many, many months. 

Another major news item that needs to be mentioned this week is continued evidence that the Bank of Japan is losing control of its Bond market. Japan was the first country to institute the policy of suppressing interest rates way back in the 1990s and they have gotten away with this defiance of natural law until they too have recently succumbed to rising prices, in large part due to a rise in commodity prices. A country can control its interest rates and, in the process, destroy its currency or it can allow interest rates to rise to their natural levels and retain a strong currency. But they cannot forever suppress interest rates without seeing their currency head toward the dustbin of history. All the western Keynesian indoctrinated countries have been destroying their currencies over the years and as long as they all go down together the system can seem stable. But now with inflation raising its ugly head, Japan, which has the largest debt/GDP of all the countries in the U.S. -NATO alliance because it has been doing QE the longest, is in quite a pickle. If it tries to protect its currency by allowing prices to rise, insolvency levels will rise. But if it chooses to suppress rates, the currency will continue to tank. That will not only be bad for Japan but also, as James Grant pointed out on Fox Business this past week, institutions from all around the world have borrowed in Japanese yen because of low rates and then converted into their own currencies. If rates are allowed to continue to rise, it will cause major losses overseas to holders of yen debt obligations. But if the yen collapses, that will bring major pain and a decline to Japan. Japan is promising to keep yields suppressed. No doubt that is why the yen continued to become weaker vis-à-vis the dollar and that may also be a reason for the dollar’s decline this past week and gold’s rise to over $1,900.

The Russians and Chinese see through massive pathology of fiat money, which is why they are seeking to create a Petro Yuan with Saudi Arabia, Russia, and Iran providing plenty of petro to make it happen. And as Alasdair has pointed out, those countries allied with Russia and China can convert the yuan they earn from their oil sales into gold. And that is a lot better than owning dollars that have lost 98% of their value since Nixon took us off the gold standard in 1971. Our western financial leaders have been asleep at the switch. Readers of this letter have not. They have been buying gold and silver and the shares of companies that find and produce real money—gold. As Alasdair Macleod observes, all fiat money is not money at all. Unless it’s gold or silver as money, it’s credit, not money. The dollars you hold in your pocket are not money. They are credit and have value only if others are willing to give you value for them and to the extent that they are able to pay their debts. If you have put some savings in gold and silver over the years, your financial well-being will be far better than if you put everything you own in debt- based money.

With regard to gold as this year gets underway, the chart below displays the monthly average gold price based on the London PM Fix every month going back to 1995. From an all-time high monthly average of $1,969.22 in August 2020, the average fell to $1,664.45 in October of 2022. So far in January 2023, the average price this month is $1,867.68 and it has cut through the 20-month average like a hot knife through butter. It truly does look like we are at the start of a new bull market in gold.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.