Inflationary data suggests the Fed is now stuck between a rock and a hard place
The government released the inflationary report forSeptember today vis-? -vis the CPI (Consumer Price Index), which showed thatinflation continues to increase. In July of this year, the consumer price indexreached an apex of 5.4% and then decreased to 5.3% in August. Today's reportshows that inflationary pressure is now back to 5.4% year over year. Estimatesby economists polled by Dow Jones were forecasting that this rate wouldincrease only by 0.3% keeping the year-over-year rate at 5.3%.
The current inflationary pressures are once again at a 30-yearhigh. More importantly it is well above the target of the Federal Reserve. Thedual mandate of the Federal Reserve is to maintain maximum employment and a 2%inflationary target rate. Recent rates have been more than double of the Fedmandate. The U.S. Bureau of Labor Statistics report revealed that consumer pricesrose 0.4% in September which took the year-over-year gain back to 5.4%.
However, the Federal Reserve adjusted its dual mandate tofocus upon maximum employment and let inflation run hotter than their 2%target. The thought process by the Federal Reserve was that much of the currentinflationary pressures are transitory in nature and will subside in arelatively short time.
According to MarketWatch, "Stronger-than-expected U.S.inflation data for September has the bond market now considering the risk thatthe Federal Reserve may end up being forced to tighten interest rates into astagnating economy with persistently higher price rises."
The Federal Reserve is most likely correct in predictingthat certain components of our goods and services have seen inflationarypressures that are transitory due to supply and labor shortages. But the realissue is the rising costs of food and energy. Many analysts, including myselfbelieve that the cost of energy and food could continue to rise and createinflation that is systemic and prolonged. Gasoline prices rose 1.2% for themonth which resulted in an annual increase of 42.1%. In September, food pricesalso had a dramatic gain increasing by 1.2% and increased 12.6% year-over-year.
Concern about rising inflation and the Federal Reserve'spersistence that it is transitory is being questioned by the InternationalMonetary Fund. According to an article in CNBC, "On Tuesday, the InternationalMonetary Fund warned that the Fed and its global peers should be preparingcontingency plans should inflation prove persistent. That would mean raisinginterest rates sooner than expected to control the price gains."
There are also members of the Federal Reserve who are notconvinced that current inflationary pressures are transitory. Yesterday, whenAtlanta Fed president Ralph Bostic commented on the factors that have createdthe inflationary pressures, higher inflation "will not be brief." St. Louis FedPresident James Bullard also commented on his fears that inflationary pressureswill continue telling CNBC that he believes the Federal Reserve should be moreaggressive in withdrawing its economic support, "reducing their monthly bondpurchases." If inflation proves to be a problem, he also believes that thatwould require an adjustment to lift off the first set of rate hikes beginningnext year.
Gold prices benefited greatly from today's news with themost active December 2021 futures contract gaining over $34 and currently isfixed well above $1790 per ounce.
The Federal Reserve's assumption that recent upticks ininflationary pressure are transitory is a dangerous assumption if they areincorrect. They have painted themselves into a corner with nowhere to go thatwould not cause economic pain should they begin to raise interest rates soonerthan they had anticipated. While it is clear that the economy in the UnitedStates is recovering, the pace of this recovery is much slower than they hadanticipated. This means that being forced by inflationary pressures to begin tounwind their extremely accommodative monetary policy too early would severelylengthen the time needed for a full economic recovery.
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Wishing you, as always, good trading and goodhealth,
By Gary WagnerContributing tokitco.com
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gary@thegoldforecast.comwww.thegoldforecast.com