Controlling the Uncontrollable — US Inflation Surprised to The Upside

It was a busy start of the week for football (soccer in Australia) enthusiasts.

On Sunday, the 2021 America’s Cup final saw long-term rivals Argentina and Brazil fight it out on Brazilian soil. ‘America’s Superclassic’ is a rivalry that’s spanned for decades.

It ended with Argentina clinching the cup, and their first major title in the last 28 years.

Then on Monday morning, England played against Italy in the final for the Euro Cup at Wembley Stadium. It was an early goal for Britain, until Italy tied the game. When no one scored in overtime, it sent both teams into penalties…worst-case scenario since it can go either way.

It ended with a win for Italy.

One of the things about football is that fans can be very superstitious.

People won’t miss a game, for fear their team will lose. Or if they’ve missed most of the games and their team is on a winning streak, they won’t start watching. They’ll put on their lucky jersey, lucky cap, set up their own routine pre-game, you name it.

I mean, nothing against it, I still wear my Argentina jersey every game. My guess is that it’s a way to feel we have certain control over the outcome.

I mention this because I’ve been thinking a lot about control this week (or lack of it).

This week too, US inflation surprised to the upside. June’s Consumer Price Index came in well above expectations at 0.9%, increasing 5.4% from a year ago. This is the largest increase in 13 years.

Excluding energy and food, which are more volatile, inflation came in at 4.5% year-on-year, the largest reading since November 1991 and well above the Fed’s 2% target.

The Fed is sticking to the story that this inflation is transitory and that they won’t be winding up stimulus any time soon. In fact, this week Powell tried to calm the markets saying that any bond tapering ‘is still a ways off’.

But there are already signs that inflation expectations are rising out there.

Global investment firm BlackRock is expecting higher inflation and has pre-empted it by giving the majority of their employees an 8% raise.

Conagra Brands, a US packaged goods company with brands like Birds Eye and Pams under their belt had to lower their earnings guidance. As they said, inflated ingredients and packaging costs are affecting their profits.

And now supermarkets are hoarding food. From the Wall Street Journal:

Supermarkets are stocking up on everything from sugar to frozen meat before they get more pricey, girding for what some executives anticipate will be some of the highest price increases in recent memory.

The move is a reversal from last year when consumers hoarded groceries because of concerns about food availability, disrupting the food industry. Now, retailers themselves are stockpiling to keep costs down and protect margins.

Few retailers expect pricing pressure to ease soon. Worker shortages are keeping labor and transportation expensive, industry executives said, as companies boost wages and offer bonuses to recruit and keep employees.

“When you have a uniquely inflationary period like now, it’s a feeding frenzy,” said Tony Sarsam, chief executive officer of SpartanNash Co. The Grand Rapids, Mich.-based retailer and distributor is stockpiling about 20% to 25% more groceries such as frozen meat and boxed foods after more than 100 suppliers notified SpartanNash that they would raise prices, he said.

Have We Hit the Bottom? Financial Expert Warns Not Yet. Learn More.

I mean, this is slightly reminiscent of Argentina’s hyperinflation period in the 1980s.

People stocked up on as much as they could as soon as they got their salaries before prices rose and would switch the rest of their money into US dollars to preserve value.

Shop owners would not replenish their stock and would stash it away because by the time they sold it, they wouldn’t recoup their money. Understandably, they would rather not sell than make a loss.

It’s obvious there’s a lot of anxiety over inflation out there…and if the Fed will do anything about it.

The US Fed has been trying to convince that they have some control over the economy, that they can control inflation, that they’ve got this.

But they are under the pump to keep stimulus going even at the expense of inflation. They are stuck between a rock and a hard place. Tapering stimulus now could deflate assets.

So far, it doesn’t look like they are in a rush to do much.

But remember too, there’s very much a psychological aspect to markets and the economy. It’s the decisions of many.

In my mind, in a situation like this, it doesn’t hurt to have some gold.


Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion

PS: Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

The Rum Rebellion