Uncontrolled inflation

Today’s numbers portend the end [Click to view in browser](. Good afternoon, The Federal Reserve got it wrong. Now, we’re all paying for it. The consumer price index (CPI) rose at its fastest pace in 13 years. Headline inflation jumped...ready for this...5.4% from a year ago! Core CPI, which excludes food and energy, soared 4.5%. Estimates of 5.0% and 3.8% failed to capture the magnitude of inflation. How bad is this? Pretty bad. Think about this. The S&P 500 gained ~16.9% this year. Accounting for inflation, the real return comes in at 11.5%. No joke, almost 32% of the profits vanish due to inflation. Inflation this high is on par with developing countries like India. Digging into the data Let’s start by pointing out obvious problems with taking the headline numbers at face value. First, energy is up 24.5% from last year. [i get it cats GIF by Toca Boca] We went from being awash in oil and natural gas to looking towards OPEC to add supply. Heck, it’s not surprising that gasoline prices are up 44.8%. And unless you’ve been hiding under a rock, we all knew used car prices went to silly places. However, a 45.2% increase in the used automotive category is...well alarming. Thankfully, food only increased 2.4%. But I wouldn’t be surprised if bacon up 8.4% doesn’t start a fight somewhere. It’s hard to believe that shelter, up 2.6%, captures the severe housing and apartment shortages. In fact, digging into the details, rent of your primary residence only increased 1.9% year-over-year. And if you put on that lockdown bulge, sweatpants to hide your tummy tum will cost you an additional 11.1% this year. The Fed’s conundrum Interest rates, in theory, control demand. They cannot control supply. Back during the oil embargo of the ’70s, restricted supply sent energy prices soaring. Inflation, driven primarily by oil prices and easy money, was out of control. The entire decade was associated with unemployment and rising prices. Finally, Paul Volker, head of the Fed, had enough. He jacked up interest rates until demand fell off a cliff. The 10-year Treasury yield jumped over 18%. These actions, combined with the length of the prior easy monetary policy, caused the most severe recession since the Great Depression. Today we face a remarkably similar challenge. More than a decade of easy money left banks awash in cash. With few places to invest, stock markets boomed for over a decade. Now, we stare at stubborn unemployment and rising prices driven by supply chain issues. Our hot take The Fed is going to reduce their bond purchases and raise rates sooner than they and the market expect. Their July meeting comes on the heels of today’s numbers and last month’s unemployment picture. The next meeting isn’t until September. Don’t expect them to change anything during this meeting. But, we should expect their tone to change. 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