Feb. 10, 2022

Inflation And The Global Economy.

It's hard to imagine that just 22 months ago, in April of 2020 inflation in the US stood at less than 1 1/2%. Inflation had been remarkably low for years.

So low, in fact, the Federal Reserve Board, made it one of their primary initiatives to increase inflation up to 2% on an annual basis.

This would avoid any danger of the country falling into deflation, one of the most dreaded outcomes for any economy.

Imagine that, inflation was rising so slowly, that it threatened the country's price complex.

Well, we couldn't be further away from that today.

In just a few minutes we will get the latest reading for the Consumer Price Index. The most important, everyday measure of inflation. It is based on the CPI, that many fixed-income programs, including social security and federal disability benefits, are calculated. Many pensions and annuities use the CPI, to calculate benefit payments for the year.

In fact, ask your Grandparents what the current Inflation Rate is, based on the CPI, and they'll be quick to give you the answer. 7% based on the latest publication of the CPI. And as I said today we will see that number updated.

The most interesting aspect of today's inflation is that it is across the board. Virtually every major form of consumer spending is being hit by these higher prices.

I go to the supermarket, everything is priced higher. The gas station is obviously the same. Clothes, shelter, medicines. Everything you can name is priced higher. Inflation like we've never seen.

Now, much of this can be laid at the feet, of disastrous lock-down policies of the last couple of years. And certainly, the anti-fossil fuel policies of the Biden Administration haven't helped.

But I'd like us to consider another source of today's inflation, and that is our global sourcing of manufactured goods.

For years Wall Street economists gleefully pointed to the low cost of goods coming from overseas. Principally China. That kept consumer prices low here in the US. They're exporting deflation, went the mantra on the Street.

Isn't it wonderful that we can go to Walmart or Amazon and purchase goods at less, than last year? It was the first time many of us had ever seen such a thing.

But it was true, the big box stores were bringing items in that we lower in price than before. Forget that they may have also been lower in quality. The point was that for average Joe and Mary consumers they could now fill their shopping basket for less.

The American consumer appeared to be wealthier. Their shopping dollars certainly went farther.

And that was all that counted.

At least that was all that counted for the average American consumer.

But that was far from what was happening in terms of geopolitics. Slowly, imperceptibly China, and others, were taking over our American markets. Selling goods at such low prices that the American Manufacturing companies simply couldn't compete. Most went out of business.

Today if you want an iPhone or a Kitchenaid mixer, they're made in China. From Timex watches to Nike sportswear, you'll have to wait for China to deliver your order.

One-quarter of all our machinery and electrical products and components come from China.

In short, we are the buyers. China and the rest are the sellers.

And so, as the buyers, we may moan and complain about these higher prices, but when it comes to most of the manufacturing it's out of our hands.

Prices are set a thousand miles away across a vast ocean.

Our fate is no longer in our own hands. We must now rely on others and hope that they have our good intentions in mind.

And that's an open question.

It may very well be, that China et al, are simply victims of circumstance in the current conditions. That the Covid Virus and subsequent lock-downs and quarantines were out of their control. That does sound reasonable to me.

However, that doesn't negate the fact, that America has, in effect, handed over our manufacturing to China. That our economy can barely operate without our Chinese lifeline. That we have become reliant on the good graces, of that very foreign country.

Today, that reliance is reflected in the higher prices we have to bear. However, it is conceivable that one day this vital source of goods and supplies may be severed completely.

Such is the risk of the new Global Economy.

Post Script

No one changes their minds as fast as a New York Trader unless it's a Wall Street Analyst. And we're seeing that this morning. Up until a couple of days ago, conventional thinking on the Street was that inflation was about to moderate. That prices would at least slow down in their historic climb.

But all that changed this morning.

And one of the first things to cause the change was the performance of the London Metals Exchange. The exchange rocketed, to use one commentator's words, to an all-time record high.

Driven primarily by the industrial metals copper and zinc. Why this jump, you guessed it: supply chain issues. Builders and manufacturers simply can't get the supply of metals that they need to operate.

So they're willing to bid up the price. Result? Higher prices in London, and the message to New York that the current bout of inflation is far from over.

Now follow me on this. So, if the issue supply, then is the answer to raise interest rates? No. Of course not.

Higher interest rates will do nothing for the supply chain. And yet after today's print, in just a few minutes, of the latest Consumer Price Index, look for the Federal Reserve to almost certainly raise rates in the US.


So looking at worldwide economic news today. We did see Russia report that their inflation climbed higher yet again last month, to now 8.3% annually. While both India and Indonesia held their interest rates steady.

This brings us to the USA. In about an hour from now, America will announce its latest measure of inflation at the Consumer level.

Now expected to come in at 7.3%, about a half-point higher than the street expected just days ago. And a level high enough to cause the Federal Reserve to raise interest rates when they meet on March 15 and 16.