The Fed is dramatically understating real inflation.
As you know, I’ve been very critical of the Fed’s inflation measures for years. The official inflation measure (Consumer Price Index or CPI) does a horrible job of measuring the actual cost of living for Americans.
I have long stated that this is intentional as the purpose of CPI is to hide the true rate of inflation so the Fed can paper over the decline in living standards that has plagued the US for the last few decades.
The Fed isn’t doing this out of ignorance, either. Back in 2002, Fed researchers actually reviewed the usefulness of its CPI metric for forecasting inflation.
The results were not pretty. In fact, the Fed discovered that its official measures of inflation (CPI and PCE) do a horrible job of predicting future inflation.
So what does predict future inflation accurately?
We see that past inflation in food prices has been a better forecaster of future inflation than has the popular core measure…Comparing the past year’s inflation in food prices to the prices of other components that comprise the PCEPI (as in Table 1), we find that the food component still ranks the best among them all…
I want you to focus on these two admissions:
1) The Fed has admitted that its official inflation measures do not accurately predict future inflation.
2) The Fed admitted that FOOD prices are a much better predictor of future inflation. In fact food prices were a better predictor of inflation than the Fed’s PCE, non-durables goods, transportation services, housing, clothing, energy and more.
Put simply, if you want to predict inflation well… you NEED to look at food prices.
With that in mind, food inflation is on the rise. As a whole, Food and Beverage inflation has broken out of a descending wedge pattern (blue lines) in the context of a massive wedge triangle pattern (purples lines). We’re heading for a test of the upper purple line shortly.
Overall inflation will be following by a few months, but it’s coming.
Put simply, inflation is rising. And at it is going to be getting worse in the weeks and months ahead. Why do you think the $USD has dumped 10% this year already?
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Chief Market Strategist
Phoenix Capital Research