We have yet to reach “peak inflation” despite a heavily-massaged CPI

• Too much debt outstanding to sufficiently raise the Fed Funds Rate to curb inflation. The Effective Fed Funds Rate peaked at 19.1% in June 1981 to combat inflation which peaked in April 1980 as measured by 14.6% year-over-year CPI growth. Total Public Debt was only $878 Billion in Q2 1980 as compared to $29.5 Trillion as of December 30th 2021. Thus, every 1% increase in the Fed Funds Rate results in an additional $295 Billion of interest expense. The U.S. runs an annual fiscal deficit in the $3-4 Trillion range and thus is not in a position to absorb trillions of dollars of additional interest expense unless the Federal government is willing to eliminate trillions of dollars worth of entitlements. This will not happen.
• The BLS is working to control the political damage caused by CPI growth. The BLS announced that it will change the CPI’s weighting calculations beginning in January 2022. Our guess is that the BLS will reduce the weighting for “Shelter” as real-world rent price increases start to make their way into Fed survey data. In fact, if one were to calculate the CPI based on 1980’s methodology, we are already at 15% CPI growth based on the work done by the folks at Shadow Stats.
• Continued expansion of the money supply, low interest rates and less accomodative producers translates to continued price inflation in 2022 and beyond. The U.S. will continue to run fiscal deficits and run massive entitlement programs in 2022 and beyond which ensures the Fed’s printing press will continue to run, thus expanding M2. In addition, many producers who absorbed price increases to their input costs in 2021 will no longer be so friendly in 2022 and will pass on a portion of these price increases to consumers and commercial buyers. Last, the Fed simply can not raise interest rates to where they need to be to fight inflation given the mountain of debt outstanding. Equity markets may very well suffer in 2022 as interest rates inch up. However, price inflation will continue to roar through 2022, even as economic growth sputters as the new year progresses.

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