The Fed Never Beat Inflation… and Now a Second Round Has Arrived
The Fed wanted you to believe inflation was beaten.
It wasn’t.
The annual inflation rate as measured by the Consumer Price Index (CPI) hit 3.8% for the 12 months ending April. That’s the highest reading in nearly three years. And bear in mind, CPI is designed to UNDER-state the true rate of inflation.
Month over Month, April’s CPI print came in at 0.6%. Core CPI jumped 0.4% for the month and is running at 2.8% year-over-year. That’s well above the Fed’s 2% target, and it’s moving in the wrong direction.
Most of the financial media is pinning this on the Iran conflict. And yes, energy is a significant part of the story. Gas prices are up 28.4% over the past year. Consumers are paying $4.50 per gallon on average, up from $3.14 a year ago.
But the more important story is what’s happening outside of energy.
Shelter is the single largest component of the inflation data with a weighting of ~30%. It just spiked 0.6% in a single month. And this is one of the slowest moving portions of CPI.
I wish that was the end of the bad news, but it's not.
The Producer Price Index — which tells you what’s coming down the pipeline to consumers — rose 1.4% for the month of April, the biggest gain since March 2022. PPI is now running at 6% annually. Producers can't absorb those costs for long. They will be forced to pass them on.
To be clear: this is broad-based. Services are accelerating. Goods are holding elevated. The inflation that was supposed to be transitory, then beaten, is now re-accelerating across multiple categories simultaneously.
Meanwhile, real average hourly wages fell 0.3% annually. Inflation is outrunning paychecks. That’s the part nobody in Washington wants to talk about. And the K-shaped economy in which the top 10% of incomes do great and everyone else is getting pinched will only work for so long. Eventually the consumer as a whole will tap out.
Put simply, the Fed is in a difficult position. Hike to fight inflation and you risk cracking a fragile economy. Hold rates and purchasing power continues to erode. Neither option is good for paper assets.
The next CPI print is June 10. If you’re not positioned in hard assets — energy, precious metals, real resources — you’re betting this resolves on its own.
I wouldn’t make that bet.
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Best Regards
Graham Summers
Chief Market Strategist
Phoenix Capital Research