Hot Inflation Shocks Markets: The Worst Is Still To Come | Steve Hanke

Steve Hanke (0:00)

The inflation genie is out of the bottle. There is a shortage of oil and storage. The physical oil prices are up about 35, 40% greater than the prices we're quoting right now. We should be very concerned about it. You can borrow from the future at a low price and sell it in the spot market at a high price. And the reason it's doing that is inventories are abnormally low.

David Lin (0:25)

It's Wednesday, October 14th, both headline and core CPI data came out this morning, exceeding forecasts by 0.1% each. Headline CPI was 3.7% year on year in September, while core CPI was 2.6%.

Gasoline went up 9.1% in September alone and accounted for more than half of the entire monthly CPI increase. Interestingly, the BLS reported that food prices actually didn't go up in September. And in fact, some food products actually went down. And what's interesting to me as well, the shelter component went up in September while many major real estate markets have been cooling off. So what is going on? We're going to get Steve Hanke, Professor of Applied Economics at Johns Hopkins University, to help us make sense of it all. How worried should we be about inflation and what is the Fed going to do next? Where interest rates headed? We'll find out with Professor Hanke. Welcome back, Professor Hanke. Good to see you again.

Steve Hanke (1:21)

Good to see you, David.

David Lin (1:23)

Great to be with you.

Steve Hanke (1:24)

A lot of action today.

David Lin (1:26)

A lot of action today. We're speaking on Wednesday. And yeah, stocks are down huge. Nasdaq's down 2%.

A lot of that was the chip sell off. S&Ps went down 1%.

Treasury yields, interestingly, are also down. We can talk about that. And gold is down. Before we talk about where markets and the bond market is headed, let's talk about inflation. Here's Scott Best in a couple of weeks ago on Fox talking about the impact of oil on core inflation. Take a listen. We'll react together.

Scott Bessent (1:57)

The Atlanta Federal Reserve GDP now, it's a noisy number, but it is currently clocking over 5% GDP growth for this quarter. And what's important here, Larry, is that is not inflationary GDP growth. If you look at core inflation away from the volatile energy shock that we've had, core inflation has been very quiescent, and it has actually dropped over the past few months. So the energy shock is not moving into core inflation. We will get to the other side of the-

David Lin (2:31)

Okay, let me just stop you up and playing that clip a couple of times on my show already. I don't think I've gotten your reaction yet.

He is right in the sense that if you look at core inflation on my screen, professor, core inflation has ticked up slightly since the previous month. But more or less, it's been on the downtrend and hasn't been at multi-year highs like headline CPI. We talked about the money supply impacting inflation, but has it impacted core inflation yet?

Steve Hanke (3:02)

Well, yeah, the core inflation is up above the target. The reason it's up above the target is that to be at the target, you'd have to be running on a sustained basis. The money supply growth broadly measured at about 6% per year, maybe even a tad under that. That's Hanke's golden growth rate of the money supply growth consistent with hitting a 2% target.

We have Divisia M4 measure, that's the broadest measure and I think the best measure of money, the Center for Financial Stability in New York puts that out every month. And it's running about 7.5%.

So it's money supplies growing greater than the golden growth rate, a rate consistent with hitting the target. And all the inflation measures, you can cherry pick and use this core one if you want, but any of them are running up above the target. So the inflation genie is clearly out of the bottle. And why did the markets react today? They reacted to the overall CPI number, which came in at 3.7%, which was higher than the consensus thought it would be up at 3.6. It was actually 3.7. So it came in pretty hot and the markets reacted to it. And I wasn't surprised at all because the underlying factor always, always is forget all the noise around the CPI number because there are over 300 items in the index. And the overall thing is what counts and the overall thing went up because overall money supply is going up. That's what keeps it up.

So, and you're right. There's a lot of diversity among the components. If you look at the main thing on the upside that's greater than 3.7 are all energy related things. The year over year, fuel oil is up 74%, gasoline is up 34%, gas utilities up 5%, electricity 4.4, and then we come down to CPI 3.7, and then we got a bunch of things that are below the CPI, and what you'd expect, apparel 3.4, shoulder 3.2, transport 2.7, and we come all the way down. New cars only are up 6 tenths of a percent year over year. Used cars are actually down by a percent and a half. So you have a wide distribution of things going on, but once you weight all those elements, put them all together, you get an aggregate index called the consumer price index, and that particular one, people pay a lot of attention to. And it's up.