My dear impertinent, dear impertinent,
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8.5% for official inflation in the United States!
“Consumer prices in the United States increased by 1.2% in March and their increase in the annual rate reached 8.5%, unprecedented in more than 40 years, but the “core CPI” index, which excludes energy and food, slowed with a limited increase to 0.3% in one month after +0.5% in February”.
“The latest consumer price figures give hope that the increase in price pressures seen in recent months has peaked,” said Michael Hewson, an analyst at CMC Markets.
This evolution, if confirmed, could call into question the preferred scenario, for the time being, of several half-point increases in the reference rates of the American Federal Reserve (Fed).
This is a deep analysis that is delivered to us in these three sentences.
Yesterday I told you about the traders who only have the trading session of the day as their horizon.
Here is another example. The markets can rest assured that inflation, which only measures what does not rise, rises little, unlike inflation, which also measures what rises!
It is true that with the war in Ukraine, the current rise in interest rates (and everyone is borrowing at variable rates except the French), the explosion in energy and food prices, there is not much money left of households to be able to buy something other than things that are going up and that are essential, such as the following three functions.
Heat and light and incidentally travel to earn a living and go to work.
These three functions are not taken into account in “Core” inflation, which again only measures what does not go up because it cannot be bought or less.
We may not go to a restaurant, buy a new piece of clothing, or even skip the next vacation abroad, all of a sudden, core inflation could mark the time.
The desynchronization of the CPI and core inflation is a recession indicator!
What I want to try to explain here is that if inflation of all essentials continues to rise in a context of wages that are not rising because they are no longer indexed, then purchasing power will collapse. If purchasing power collapses, there will be no more “non-essential” consumption. Therefore, there will be no “core” inflation. Then there will be a desynchronization, but this desynchronization actually implies a great economic recession where all sectors will be affected by the “disconsumption” of households that will no longer be able to keep up.
So it’s not a good drop in inflation.
The markets have not yet understood this.
Inflation was supposed to be temporary and transitory, it is lasting and getting stronger.
The prices of the essentials will take most of the purchasing power giving rise to massive consumer arbitrage.
Initially, one might think of the end of inflation.
But it’s wrong.
Suddenly, the markets discover that this is good news because rates should rise less quickly, if there is less inflation than expected. Then all of a sudden gold goes up as rates will go up less quickly.
In my opinion, all the reasoning is wrong.
Raising rates to bring down the price of oil or gas when there is enough and available cheaply when you get mad at one of the last big suppliers (Russia) will have no impact except for “core” inflation. Buying gold thinking that rates will not go up is not a good idea either.
The reality is that the inflation of the essentials will continue and will crush the middle and even slightly upper classes.
Rates won’t be able to go too high without creating a wave of widespread insolvency for states, households and businesses alike.
Whatever happens, we are going to enter a recession.
You have to buy gold because inflation is going to devour savings and purchasing power because inflation is going to last, because the energy transition is inflationary, because states are getting closer to bankruptcy.
It is already too late, but all is not lost.
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Source Investing.com ici