Today, the U.S. Bureau of Labor Statistics released the May CPI (Consumer Price Index). The report confirmed what Americans have known and rooted in; the fact that inflation remains uncontrolled, and is now at its highest point in 41 years. The CPI rose 0.3% in April. This brings last month’s inflationary pressures to the highest year-on-year change in 41 years. This means that if you were born in 1982 or later, you are witnessing and experiencing the highest monthly (year-over-year) rise in inflation ever.
Just the facts
- CPI rose 1% month-on-month (MoM)
- Inflationary pressures rose in both the CPI and the underlying CPI
- The underlying CPI rose 0.6% bringing the year-on-year inflation rate to 6%
- The CPI rose to 8.6% year-on-year, the highest annual gain since December 1981
- The most significant increases in the CPI were the costs of food, energy and housing
Forecasts varied according to economists surveyed by Bloomberg, Reuters and The Wall Street Journal. Economists surveyed by the Wall Street Journal predicted that the CPI would reach 8.3%, rising 0.7% month-on-month. Economists surveyed by Reuters also predicted that the CPI would rise 0.7% month-on-month. Economists surveyed by Bloomberg News said the CPI would reveal that inflation is keeping at roughly the same monthly pace and that the probability of a higher year-on-year level of inflation was high.
Three-pole economists have been wrong. Economists polled by Bloomberg, Reuters and The Wall Street Journal underestimated the rise in MoM inflationary pressures.
The biggest contributor to this sharp rise in inflationary pressures is the cost of energy, which rose by 34.6%. However, almost all components recorded record increases, including food costs, which increased by an average of 10.1%. The cost of housing increased by 5.5% and the set of raw materials increased by 8.5% year-on-year.
What does this mean for consumers; more difficulties ahead
Given that average hourly earnings have fallen 3% in the last year and the costs of the goods and services they need have risen sharply, it equates to more hardship for low- and middle-class Americans. This also means that newly acquired debt (mortgages, new car loans, etc.) will not only be harder to benefit from, but will be more expensive to service. Existing balances will also be dramatically affected. Variable rate credit cards will increase, making existing balances more expensive to service.
How the current CPI will affect the future orientation of the Federal Reserve
The Federal Reserve will hold its June FOMC meeting on Tuesday next week and conclude on Wednesday. While a minority of economists predict a 75 basis point (3/4%) rate hike, the Fed’s chances of being more aggressive in measuring monthly rate hikes are extremely minuscule. The Federal Reserve’s most likely future direction is to continue raising rates by 50 basis points after the remaining FOMC meetings this year. The question is how many 50 basis point rate hikes will the Fed implement and what will be the Fed’s fund rate at the end of the year?
A roller coaster for gold traders
Traders and investors experienced another wild trading session that can be best characterized by its extreme volatility. The chart above is a 10-minute gold futures chart. At 8:30 a.m. EDT gold futures opened at $ 1,850, and at 8:40 a.m. EDT traded the daily low at $ 1,826.50. As of 4:40 p.m., EDT gold futures are up $ 22.70 or 1.23% and are set at $ 1,875.60.
As we have been addressing for many months, our belief is that inflationary pressures have not peaked and will in fact continue to rise as long as the underlying cause remains persistent. We have expressed a lot in our opinion that the current forward direction of the Federal Reserve will not reduce inflationary pressures. At best, higher interest rates will shrink the economy to such an extent that they will cause a recession. At worst, their actions will be detrimental to fueling higher inflationary pressures. The current level of inflation and the current future direction of the Federal Reserve will give great support to the rise in gold prices over the next two years.
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I wish you as always a good trade,
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