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Inflation Prediction Roulette: Look for a Surprise

Last Friday the White House put out a warning (via Reuters):

White House expects next inflation numbers to be elevated

That of course set the markets, economic blogosphere, and the Bubblevisions into a tizzy. In fact, the consensus prediction for today’s CPI report is so tight that perhaps this might just be the day to step aside while the world goes insane.

Of course I am Mr. Contrarian and understand that the Bureau of Labor Statistics motto of “there are statistics, more statistics and damned lies” is still in force as the CPI has been a political versus and economic data point since the early 1990’s.

That is why I shall stick with my original prediction from the July 4th thread:

8. After a brief respite from the high inflation numbers for June with CPI-U coming in slightly lower at 8.2%, a resurgence due to shortages and labor strife in July creates panic as bonds sell off when the reading for August comes in north of 9%.

This should trigger a fierce bear market rally through tomorrow until everyone takes a moment to look under the hood of the report and compare it to the regional Federal Reserve inflation reports.

The number one issue facing future inflation reports is the housing problem. Despite a flood of inventory returning to the markets, those homes that are not selling are primarily at the high end of pricing keeping the lower to lower-middle class buyers completely locked out. This distortion does nothing to cure this data point and will keep inflation elevated until deep into the 4th quarter of this year:

If anything, with multifamily building slowing and projects in states with already deteriorating conditions starting to see an economic slowdown, the cancellation rates will continue to soar, exacerbating this problem well into 2023.

The other data point the Fed, the Biden Junta, and the Bubblevisions do not want to discuss is the purchasing power of the consumer in US dollar terms. To say it has been deteriorating is an understatement as this chart demonstrates:

That particular data point will probably continue to deteriorate and what makes that incredible is the fact that the US dollar is stronger than it ever has been in over twenty years. Normally a stronger dollar increases purchasing power, but for the first time in modern history this is not the case:

In this author’s opinion, this divergence will end as the US dollars floating around the world will come home with a vengeance in the 3rd quarter of this year creating a worsening inflationary situation as foreign participants continue to get out of American assets. This is where the Fed will find itself in a trap as economic momentum slows and turns recessionary yet a cut or slowing of interest rate increases will trigger the risk of hyperinflation before deflationary forces take over to save them.

Keep in mind, if I am wrong and the CPI-U comes in hotter than consensus and triggers a massive equity sell-off then that could be the trigger for the 2nd leg down before the big one this autumn. The larger players have been selling into every bear market rally while sending their permabulls out on the Bubblevisions to pump things up thus why there is a risk that the market could implode the remainder of this week; especially if the earnings reports indicate future problems with growth and earnings.

Stay tuned for the circus folks, today will not be a dull one, especially as markets try to figure out this report.

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