So, inflation is not transitory. On the contrary, the chart above shows that the overall CPI reading for June only worked as a peak temporarily. The fact that inflation has rebounded to a new high is a final blow to the “transitory inflation” story. Therefore, my warnings that inflation is not going to go away anytime soon remain valid.
In fact, my arguments have been reinforced by recent data. Why? Well, inflation has intensified despite the fact that several sub-indices fell in September. As can be read in the BLS report:
The air fare index continued to decline sharply, falling 6.4% over the month after falling 9.1% in August. The clothing index also fell in September, falling 1.1% on the month after increasing 0.4% the month before. The used cars and trucks index fell 0.7% this month, continuing to decline after falling 1.5% in August.
So why hasn’t inflation come down? After all, the dominant narrative was that inflation was caused by a few categories strongly tied to the pandemic and the reopening that followed. Well, there we are; these categories have fallen, but inflation has increased. The answer to this conundrum is: Fed officials and experts got it wrong. Inflation is not confined to a few categories due to supply chain disruptions, it is a widespread phenomenon caused by increasing broad money supply and demand for money.
More specifically, declines in some sub-indices were offset by increases in others, notably by the significant acceleration in the housing index. As can be seen in the graph below, the housing index jumped 3.2% in September, much faster than the 2.8% seen in August.
This acceleration is perfectly in line with my analyzes. In September, I wrote:
Second, the housing index – the main component of the CPI – has been increasing gradually since February 2021, and it has accelerated from 2.79% in July to 2.82% in August (…) As a reminder, house prices – which are not covered by the CPI – have increased recently, which should translate into further increases in the housing index.
Oh my God, I hate to be right! However, I’m afraid that consumer inflation could increase further in the near future. A close look at money supply growth implies that the real peak of inflation could occur in the first quarter of 2022. Given the upward trend in house prices, the housing index could continue to rise. Last but not least, the surge in the producer price index (see graph above) could also increase inflationary pressure.
Implications for gold
What does the September CPI report imply for the gold market? Well, the theory remains the same: high inflation should be positive for gold because it is seen as a hedge against inflation. Higher inflation also means lower real interest rates and a weaker greenback, which should support gold prices. However, high inflation has not supported the yellow metal so far, as it raised expectations for the Fed’s tightening cycle, putting downward pressure on gold prices.
Overall, the September report (which showed continued rising inflationary pressures) prompted investors to rethink the Fed’s transitional argument. These worries pushed gold prices to their resistance level of $ 1,800 on Thursday, as shown in the graphic below.