Bust: How 7.9% Inflation Exposes US Economy’s Shifting Game Rules
February CPI Rises 7.9% Annually, Marking Fastest Jump Since 1982
The Bureau of Labor Statistics’ Consumer Price Index (CPI) report for February revealed a staggering annual increase of 7.9%, confirming the persistent inflationary trend that has gripped consumers over the past year. This upward trajectory marks the fastest pace since 1982, sparking concerns about the nation’s economic stability.
A quick breakdown of the entire report is showcased in the graphic below: [insert graphic]
The inflationary pressures are compounded by a significant rise in rents across various regions, with year-over-year increases reaching as high as 20%. Furthermore, used car prices have skyrocketed by an astonishing 41%, shattering the traditional depreciation rate of -8% per annum. These staggering figures underscore the alarming pace of inflation and prompt pressing questions about transitory versus persistent inflation.
Can you recall a time when the financial media repeatedly announced that inflation concerns were overblown? As long-time readers know, our focus has been on the ‘real rate of return,’ calculated by subtracting inflation from the risk-free rate of Treasury-Notes (T-Notes) yields. Currently, 10-year T-Notes yield 1.98%, while February’s CPI stands at 7.9%. This translates to a guaranteed loss of approximately 6% annually when investing in government debt.
The implications are multifaceted: the Federal Reserve is no longer purchasing government debt and has begun to raise interest rates. But who will absorb this increased burden? Are individuals prepared to suffer a continued decrease in their money’s purchasing power, now that the real rate of return teeters at -6%? Historically, debasement of the currency has addressed these issues, but its effects are far-reaching and perilous.
A Broad Perspective on Inflationary Pressures
The monetary authorities’ calculations are designed to report the lowest possible numbers. However, there is a prevalent notion that real inflation, particularly among low-income brackets, exceeds double digits. This idea aligns with the trend of Producer Prices (PPI), closely monitored by the Federal Reserve.
Since the start of the economic lockdown and pandemic, PPI has climbed over 30%. When factoring in the precarious financial situation confronting more than 50% of Americans who live paycheck to paycheck without investable assets, they are being financially depleted through currency debasement. One fundamental principle remains true: you cannot simultaneously print trillions of dollars, manipulate interest rates to near zero, make substantial asset purchases, and expect no long-term consequences.
A Tradition of Stagflationary Conditions
We observe the traditional pattern of stagflation – increasing inflation coupled with decreasing growth. However, this scenario is now accompanied by a monumental burden: government borrowing now surpasses $30 trillion, and the government’s debt-to-GDP ratio has soared to 125%. For context, that ratio was merely 58% in the year 2000, signaling an unprecedented national economic risk.
Exploring the Federal Funds Rate
A long-term Fed Funds rate chart reveals a striking decline since 1979. Today, interest rates are near zero, setting a precarious foundation for future recessions or depressions.
| Year | Fed Funds Rate |
|——–|——————–|
| 1955 | 2.45 |
| 1980 | 15.87 |
| 1993 | 2.96 |
| 2001 | 1.78 |
| 2023 | near zero percent |
The table highlights the critical conundrum the Federal Reserve faces. Inflation is at a 40-year high, economic growth is contracting severely, interest rates are near zero, and the monetary authorities claim they must raise rates.
Why the Fed Must Reassess its Strategy
If we were to slip into a recession amidst current conditions, it would be unprecedented – a downturn occurring despite interest rates being at or near zero. The prospect should prompt the Federal Reserve to reconsider its stance on raising rates, which are likely to topple the economy into prolonged stagnation.
Inflation’s Perilous Effects
While destroying real wages and increasing borrowing costs is concerning, inflation’s insidious effects are even more formidable. When PPI exceeds 30% and consumer prices surge past historical highs, real wealth evaporates. The challenge remains: finding companies with solid financials who can grow despite the staggering rent increases.
Surviving Zero-Sum Gaming
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Feedback Loops and Success in Trading
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