Peter Schiff: The Fed’s inflation reading is hilariously wrong

Americans are feeling uneasy for reasons that are hard to pin down,” quipped economist Paul Krugman in a New York Times interview published earlier this week.

Reasons that are hard to pin down? Bear in mind that this man received a Nobel Prize– our society’s most prominent award for intellectual achievement. Yet he doesn’t have the foggiest idea why his fellow citizens may be feeling uneasy.

Perhaps it’s the ever-lurking prospect of escalated warfare. Or the exasperation over dysfunctional government, weaponization of the justice system, and manipulative media. Or the invasion of millions of migrants streaming across the southern border, virtually unchecked.

Granted those issues may be outside of Krugman’s wheelhouse. But you’d think that he would at least understand people’s unease over inflation.

Yesterday the federal government reported that the Consumer Price Index (one of their key measures of inflation) was unchanged in the month of May… prompting official in the Biden administration and most “experts” like Krugman to uncork the champagne bottles and toast the end of inflation.

It has now been more than three years since the US inflation rate surged beyond the Fed’s 2% threshold… and over two years since the Fed began raising interest rates in an attempt to arrest that inflation.

Yet even after all this time, inflation at 3.3% still remains in excess of the Fed’s target rate.

3.3% is obviously much lower than its peak 9%. But that’s not really the point. For everyone else who doesn’t work at the White House or Federal Reserve or New York Times, it’s not about 3% versus 9%. It’s about the 20%+ change in prices over the past three years.

And many categories have seen price increases far in excess of 20%– and housing is a great example.

The median US home size back in Q1 of 2021 was 2,284 square feet and priced at $355,000. Three years later the median US home size shrank to 2,140 square feet, yet the price increased to $420,800.

So, Americans are paying more to live in smaller homes. On a per square foot basis, the price increased 26.5% in three years, from $155/ft to $196/ft.

But it becomes much worse when you factor in financing costs.

Interest rates were 3.2% back in Q1/2021, versus more than 7% three years later. So, the average monthly payment (principal & interest) per square foot for the median US house increased from $0.68 per square foot per month in Q1/2021 to $1.33 in Q1/2024.

That’s an increase of 95%– nearly double in three years. And this increase doesn’t factor in rising costs of homeowners’ insurance, HOA dues, maintenance costs, and property taxes.

Owning, maintaining, or renting a home is a LOT more expensive than it used to be… and people are sick of it. Yes, 3.3% inflation is better than 9%. But people don’t want less inflation (that’s still too high). They want prices to go back down.

Nobel laureate Paul Krugman doesn’t get it. Neither does Joe Biden… who seems irritated beyond belief that Americans aren’t groveling kowtowing in honorific gratitude over his handling of the economy.

The dirty secret that no one in power wants to say out loud is that prices will never go back down to where they were a few years ago. This is known as deflation, and the Fed simply will not allow it to happen.

For normal people, deflation is great. Who wouldn’t want lower prices?

But when you’re the most indebted government that has ever existed in the history of the world, deflation is a terrifying outcome that must be avoided at all costs. They much, much prefer inflation.

In 1914, at the outbreak of World War I, the British government borrowed what was considered an enormous amount of money at the time– more than 600 million British pounds. They paid interest on that debt for literally 100 years… and finally paid off the principal balance in 2014.

Obviously by 2014, 600 million pounds was a pretty trivial sum… thanks to inflation. And that’s the idea– inflation erodes the value of money over time, so heavily indebted governments can benefit from the mere passage of time.

The Fed knows this. They understand very well that the US government, with its $35 trillion debt, needs inflation to continue. And that’s why the Fed will never allow prices to go back to ‘normal’.

The Fed chairman made no mention of trying to bring prices down in his press conference yesterday. None.

In fact, he’s already talking about cutting interest rates– something the Fed would ordinarily only do once inflation has been licked once and for all. There was also no mention of the Fed potentially have INCREASE interest rates if the inflation problem worsens.

Nope, it was just more of this false sense that they have everything under control.

To make matters worse (and we’ve written about this extensively), the US government expects to add an additional $20 trillion to the national debt over the next ten years. It’s a staggering figure that will almost certainly create even more inflation.

Historically speaking, whenever the US government significantly expands the debt in a relatively short period of time, most of that financing comes from the Federal Reserve creating brand new money.

In the first two years of the pandemic, for example, US government debt surged by $7 trillion. The Federal Reserve. Over the same period, the Federal Reserve created $5 trillion in new money– with most of that going to buy Treasury bonds.

In other words, the Fed ‘printed’ over 70% of the money that the US government borrowed in the first two years of the pandemic. And that $5 trillion of new money created 9% inflation.

So just imagine how much inflation the Fed will create if they print 70% of the $20 trillion that the US government will need over the next decade…

No one knows for sure. But it’s probably going to be a lot more than their magical 2% target.

Source

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