The Fed claims that inflation is just “noise” but the clear signs of inflation have been appearing everywhere in the system going as far back as 2008.
Let’s be clear here… inflation does NOT mean prices have to move higher in nominal terms. The reason for this is because companies cannot and will not simply raise prices overnight. Consumers will not simply put up with the cost of a good going up time and again.
So don’t look for the cost of an item to necessarily go straight up in nominal terms. This can happen, but more often than not, corporations engage in a number of different strategies to maintain profit margins without raising prices.
These strategies include:
1) Shrinking the box/package of the good, thereby selling less for the same amount.
2) Not filling the package all the way; again selling less for the same amount.
3) Changing what’s considered a “serving size” or the quantity of good being sold.
4) Swapping in lower quality ingredients, thereby selling a lower quality good for the same amount.
Companies have been doing all of these since 2008. Most recently however, costs have risen to the point that these strategies won’t cut it anymore. Consequently, we’re starting to see prices going up across the board.
Housing is now more expensive relative to incomes than it was in 2007. Food prices for 5 out of 6 items at the grocery store have risen year over year. Gas prices are at their highest levels since the oil bubble of 2008. Healthcare costs have risen. In fact, just about everything under the sun except phones and computer tablets have risen.
This is why the Fed’s claim that higher prices are just “noise” is so ridiculous. The Fed is either ignorant or lying. Neither of those is good. Indeed, the only support the Fed has for its claim is that bond yields remain at historic lows (see below).
However, the Fed is missing the big picture here. The reason bonds continue to fall in yield is because:
1) Wall Street is front-running the Fed’s QE programs (buying bonds from the Treasury and then flipping them to the Fed for a quick profit).
2) Financial institutions, particularly in Europe, remain highly leveraged and so are seeking higher-grade collateral by buying US Treasuries.
3) The Fed has created an artificial floor beneath Treasury demand by soaking up half or more of all US debt issuance each month for the last five years.
You cannot mess around with the entire risk profile of the investment world and expect not to see asset classes mispricing risk. The Fed has pumped money into the system in over 90% of months since 2008. It’s kept interest rates at zero throughout this period. And it’s put nearly $4 trillion into the financial system.
Does the Fed really think it could do this and NOT cause inflation?
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Best Regards
Phoenix Capital Research