Hey guys, it's sasha, the us inflation report for december 2021 has just come out and the market is taking it very positively. The s p 500 went up 0.5 as soon as the numbers came out and growth stocks are up massively across the board. So everything is great right. Well, no, if you dig into the numbers, i think the data is a lot worse than the media is going to report and i'm going to tell you exactly why.

First off all the positive news about the inflation report seems to be missing the obvious point, which is the fact that inflation has gone up yet again and is now at 7.0 percent. This is the highest rate of u.s inflation since june 1982, and the rate at the beginning of last year in january was just 1.4 percent. And the truth is that if inflation is going up from one point, four percent to seven percent in the space of just one calendar year, that is not good news, no matter how you package it now, it is true. Markets have already baked in quite a lot of this inflation fear into their valuations.

Many growth stocks are trading at 30 to 60 off the prices that they had before the sell-off started in november, but i think the positive reports are missing. Some really important points that have come out in this report that sort of back up things that i've already said previously. First, let's look at the energy numbers in december 2021, oil and gas prices dipped by 10 to 20 percent compared to the same numbers in october and november and even more importantly, those same prices were up about five percent in december 2020 compared to october and november 2020., so there was a net drop in energy costs of roughly speaking, maybe around 15 to 20 in terms of the year on year, metrics in december, compared to what those same numbers looked like in the two months before and on its own energy only has a Seven and a half percent waiting in the overall consumer price index, but even on that basis, if everything else stayed flat, we should have seen a drop of about one and a half percent in the oval rates. Just from these energy movements, you can even see that 15 to 20 dropped very clearly in the data.

Energy change was 33.3 in november and that dropped to 29.3 in december and all the constituents dropped as well. But the overall rate is up 0.2 up from 6.8. In november to 7 in december, so that means that the rest of the cpi went up well over one percent in reality to compensate for that drop in energy prices that's month to month, and that is pretty bad now. You've got to remember that energy has a much higher real impact on cpi than just that weighting, because it has a big indirect weight in many of the other components as well that you can't really strip out properly.

Food and services are definitely very heavily, for example, impacted by energy prices, so we're probably seeing an even greater real terms increase in non-energy inflation, and why is that important? Well, energy prices fluctuate to go up and down and in the long term they aren't as important as what is happening underneath and at the moment they are very much masking a much more serious underlying trend of non-energy inflation rising faster rather than slower as the numbers. Maybe indicate now look at shelter. Shelter is a huge component of cpi. It's about one third of the total.

It is massive, but, unlike most of the other components, shelter inflation doesn't come from real, proper data, they don't go and take everyone's rent payments and mortgage payments and all of that and figure it out. Shelter numbers come from basically surveys that kind of ask people how much they think rents are increasing property prices, increasing that kind of thing, and this means that cpi has a massive lag. Naturally, when it comes to shelter numbers because rents and mortgage payments are long-term commitments. So if rates are going up sharply, most people won't be directly impacted directly aware, because you know their two-year rental agreement has a fixed price until whenever they have to go and do a new one, but look at what's happening with shelter.

It is up 4.1 percent up from 3.8 in november and it is going up consistently by 0.4 percent every month. These are month on month on month, increases but now go and look at the actual rent price data from any source. You want that collects the actual numbers on new rental deals and you'll see a very different pattern. In the second half of 2021, rental costs in the us are up between 12 and 20 percent, depending on which source you use certainly way way more than the 4.1 percent.

That is being reported in this cpi report for december, and here is the big problem. The gap between that 4.1 percent, that is in the report and the real rent increases of 12 to 20, will have to eventually come through in the cpi data. Unless rental cars suddenly magically drop all the way back down. So you have one third of your index that, based on this data, could well continue going up for at least the next 12 to 24 months by at least 0.4 to 0.5 percent every month.

So if that is how it transpires every month, you basically have a net 0.15 0.2 increase to the cpi, at least guaranteed from that one-third that is made up of property. So the rest of the index combined has to be negative by 0.2 percent every single month. Just to keep inflation flat just to stop it from continuing to go up even more, and there are lots of other interesting numbers in the report that probably don't necessarily have huge term long-term issues. For example, used car prices are ridiculous, they're up 37.3 percent a year and year massively up from even the previous month because of the chip shortage.

The massive uncertainty from the big car manufacturers them not being sure whether they should continue producing the cars they're making maybe switch to electric. I had a look at my five-year-old car on the market and it is now worth about as much as it was when it was brand new, which is mind-boggling. But here is the really big issue. Crude oil is back to over 80 in january up quite a bit from december, so the low we saw in december in terms of energy prices is not going to be here when we go and look at the january numbers in february, but in any case the Real pace of inflation outside of energy is being said by non-energy drivers, because, even though energy indices are way down in december, we still had inflation overall go up.

So we had this artificial, one-month suppression factor and everyone is celebrating at the highest level of inflation. In almost 40 years as though it's somehow a massive win, the markets are bouncing. Financial commentators are saying it's all dandy. We have bright rosy future ahead of us, but we're looking at real terms.

Inflation rate that is well into double digits in january. The reference points for the cpi basket are also going to be updated with more recent, more up-to-date data, so there is an increased risk that the numbers we're going to be seeing in january next month may look a little bit more close to reality than the numbers. We saw in december and while the markets are celebrating this, for whatever reason, this will probably mean that no action of this fact that everyone's happy about it there'll probably be no action taken by the fed in january, and probably for at least two months. We heard you're in power say yesterday that maybe we're gon na be seeing something somewhere in march or something so.

The rates are going to stay at zero, while inflation is continuing to gain every month. Not point two percent is maybe not quite as high as it has gone up recently, but it's still up and so rates are staying at zero, while inflation is gaining every month, but just because the inflation is not gaining as much as maybe it could have. Apparently, rates do not need to go up as a result. This is eerily similar to what happened in turkey.

Inflation was climbing, and the government played the transitory card and said that hey inflation is going to go away all by itself. We don't need to increase rates and they didn't they refused to increase rates, and turkey has now gone into full-on hyperinflation, with inflation at 36 percent in the latest report for year and year, and the country's economy is in full meltdown mode. What happens if we're looking at inflation of percent or higher when we're looking at february data in march, it's in two months time having interest rates below the rate of inflation is very rare as it is, but having interest rates at eight percent below the rate of Inflation is unprecedented by a massive margin. We've literally never had a situation even remotely close to this in modern economic history.

There is no precedent - and this is the real problem, because the thing with economics is that there are some basic fundamental factors that exist and that tend to repeat themselves, and that tend to kind of work, because we see them working and historically spiking inflation doesn't just Go and tend to come down all by itself. If you just ask it nicely the way inflation usually does come down pretty much. Every single time in this sort of situation is, if you increase interest rates, and you have to increase interest rates to above, where inflation is usually by a cushion of 30 to 50 percent. So if you want to exert that downward pressure on inflation now, with the rates at seven, you'd want interest rates to go up to somewhere in the region of 10, and the really big problem is that the longer you wait, the higher that number is going to Be and when you've just thrown more money into the economy in the space of just a few months than you ever did in total ever before, and when the government debt repayments are spiraling, increasing rates sharply might not look very pretty, but hey.

The government is not going to go bankrupt. Those debt figures are to some degree academic, but there are entire business sectors out there that are now heavily leveraged after two years of the pandemic. While there has been some personal debt repayment over the two years of lockdowns on average, there is an unprecedented number of people whose financial predicament is very finely balanced on unsustainably low interest rates. So the next time those people or businesses go and refinance their debt, and their rate goes from 2 to 15.

We're gon na have a very real chance of a new version of 2008 smacking us right in the face. If you found this video useful, please don't forget to smash the like button for the youtube algorithm. Thank you so much for watching. I really really appreciate it.

As always i'll see you guys later.