Introduction to Inflation
The December Consumer Price Index (CPI) report was highly anticipated, with analysts warning that the data would be "muddy." The report indeed lived up to these expectations, but to truly understand the current trajectory of inflation, one must look beyond the CPI data itself.
Understanding the CPI Data
The December CPI data showed that prices rose 0.3 percent month-on-month, in line with expectations. The headline annual CPI rate remained unchanged at 2.7 percent, still above the target rate of 2 percent. Core CPI, which excludes volatile food and energy prices, rose 0.2 percent month-on-month, with the annual core CPI holding steady at 2.6 percent. This was slightly lower than projected, leading to some optimism that the Federal Reserve might continue its monetary easing in 2026.
Breaking Down the Numbers
A closer look at the numbers reveals some interesting trends. Shelter prices increased by 0.4 percent month-on-month, while food prices surged by 0.7 percent in December. Energy prices also ticked up 0.3 percent, despite a drop in gasoline prices. Service costs rose by 0.3 percent, reflecting price gains mostly unconnected to tariff pressures. Used cars and trucks saw the biggest price drop, falling 1.1 percent.
The Real Inflation Story
While the CPI provides some insight into general price movements in the economy, it doesn’t tell the whole story of inflation. Inflation is technically an increase in the supply of money and credit, with rising consumer prices being just one symptom. To get a full picture of inflation, one needs to look at the trajectory of the money supply.
Money Supply and Inflation
The money supply has been growing at the fastest rate since July 2022, with the Federal Reserve revving up the money-creating machine. After peaking in April 2022, the money supply began to decline as the Fed hiked rates, but it bottomed out in October 2023 and has been increasing again. This acceleration in money creation is a sign of increasing inflationary pressures.
The Federal Reserve’s Role
The Federal Reserve is once again expanding its balance sheet, effectively relaunching quantitative easing. This means the central bank is buying U.S. Treasuries using money created out of thin air, which is by definition inflationary. The Fed is in a Catch-22, needing to cut interest rates and run quantitative easing to support the debt-riddled bubble economy, while also needing higher rates to keep price inflation under control.
Conclusion
In conclusion, while the CPI report may have shown some signs of "cooler" inflation, the real story of inflation lies in the trajectory of the money supply and the Federal Reserve’s actions. With the money supply growing at an accelerating rate and the Fed relaunching quantitative easing, inflationary pressures are likely to increase. As the Fed continues to loosen monetary policy, we can expect more inflation, despite what the CPI data might indicate. This means that investors and consumers should be prepared for the potential consequences of rising inflation, including higher prices and reduced purchasing power.
