Peter Schiff sees policy capitulation on inflation noting that the October CPI inflation rate of 4%, which excludes energy and food prices, is still well above the Fed’s mandated 2% inflation rate.
October CPI came in lower than expected, sparking a rally across all asset classes, from gold, stocks, bonds and cryptos.
Cooling prices support the bullish view that the Fed tightening policy has been successful and that the rate hiking cycle is over.
“Peter Schiff sees policy capitulation on inflation noting that the October CPI inflation rate of 4%, which excludes energy and food prices, is still well above the Fed’s mandated 2% inflation rate.”
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Peter Schiff sees policy capitulation on inflation with core inflation barely falling
Core inflation measures the long-run trend of prices, excluding transitory price changes.
Why are there so many variations in calculating inflation if the statisticians were not trying to hide the reality?
Frankly, the simplest way to measure inflation is to compare the monthly price of a loaf of bread which has few substitutes and is consumed by most households. The price built into a loaf of bread includes soft food commodities, transportation, wages and energy costs, and gives a more realistic view of price changes.
But in the age of narratives, lying with statistics is more important than facts. So, the cheerleading mainstream media are applauding the central bank as it does a victory lap on inflation. Meanwhile, the bond bulls come charging back into the bond market and debt, the central bank’s product, becomes sexy again.
The latest 20-year treasury auction sees strong demand, long-maturity bond yields start falling, stock prices are recovering, and everything is fine in Alice and Wonderland.
“So, as a result of this supposedly great news on inflation, the markets believe the Fed is done, that the war on inflation is won, and the Fed has been victorious, and now it can start taking its troops off the battlefield by cutting rates,” said Peter Schiff.
“the markets believe the Fed is done, that the war on inflation is won, and the Fed has been victorious, and now it can start taking its troops off the battlefield by cutting rates”
Peter Schiff sees policy capitulation on inflation being double the Fed’s target of 2%
“Nothing is indicating we’re heading toward two,” he said.
“Just because we’re at four now doesn’t mean we’re going to two. We could just as easily double and go back up to eight. There’s no reason to conclude that that’s where we’re headed. But even at four, we’re still way above the Fed’s target of 2%,” he said.
“If Americans can’t afford to buy stuff at the current price, well, it’s even less affordable when the current price goes up. Prices have gone up dramatically over the last two or three years. Relief would require prices to come down so that some of these gains are reversed,” he added.
Peter Schiff argued that the CPI data doesn’t prove the Fed is winning the war on inflation.
“This is trough inflation. These numbers are banging around the bottom and we’re getting ready to move higher. And so we’re going to move further and further away from the Fed’s 2% target, not closer to it,” he said.
“Why did the dollar drop? Because the markets believe the Fed will relent on interest rate hikes and pivot to cuts” – Peter Schiff
Inflation is a war the Fed cannot win,” which is why Peter Schiff sees policy capitulation
“The big drop in the dollar after the CPI data came out is one of the reasons. Why did the dollar drop? Because the markets believe the Fed will relent on interest rate hikes and pivot to cuts,” he said.
Explaining the USD’s recent depreciation, Peter Schiff noted that what counts is not the dollar purchasing power but the direction of interest rates. Indeed, to avoid the bond and stock market rout, investors hid in USD during the Fed’s tightening cycle.
But a dollar depreciation is why Peter Schiff sees policy capitulation on inflation.
The strength of the dollar helped do the Fed’s work. As the dollar rose, commodity prices dropped, driving the CPI lower.
“Here is the problem; the minute the Fed claims victory or even the markets think that the Fed is winning, even before the Fed declares ‘mission accomplished,’ the markets start trading down the dollar. The dollar starts to fall.,” he said.
A falling dollar means rising commodity prices
But the central banks work in cahoots and will ease together, cushioning the dollar fall.
“Inflation is caused by too much money chasing too few goods – not economic strength” – Peter Schiff
Peter Schiff sees policy capitulation on inflation as the Fed’s balance sheet remains close to 8 trillion dollars, which is ten times larger than what it was in 2008
“It doesn’t matter that we went from zero to 5%. Five per cent is still not that high of a rate. But you’ve got to look at all the money, the money supply, all of the liquidity that has been pumped into the economy during that period. Barely any of it has been withdrawn,” he said.
But 2023 is a more highly leveraged economy than 2008, so smaller rate hikes magnify the impact on households, businesses and government.
Peter Schiff then explained that contrary to conventional wisdom, a weakening economy will not tame price inflation.
“Inflation is caused by too much money chasing too few goods – not economic strength. A recession will lower production, but consumption typically remains supported by government handouts and fiscal stimulus. Meanwhile, the central bank pours even more money into the economy through rate cuts and QE,” he said.
He also noted that the recession means a larger public deficit, which is inflationary.
Will Peter Schiff see policy capitulation on inflation view, hold water?
Perhaps the greatest threat to inflation continuing is the current world disorder, global power struggle, and WW3.
The rise of an alternative economic BRIC system, with its own trading rules, military alliance, and eventual currency, outside the US-centric sphere of domination is probably the greatest threat to post-WW2 US hegemony, the dollar as a reserve currency and global demand for treasuries.
The US went into WW2 with a public deficit exceeding GDP, and what followed was the golden years of the 1950s great prosperity.
Multipolarity leads to a power struggle, a war, which eventually ends with a hegemonic power.
The conclusion to the current global world order power struggle could determine the fate of interest rates and the dollar.
Perhaps what happens on the global stage,the battlefields could be more influential than what happens within the walls of the Fed.