Hey guys, it's sasha, the us bureau of labor statistics just published the consumer price index data for march, and it looks ugly. Inflation is running at eight and a half percent over the last 12 months, with the all items index increasing by 1.2 percent on a seasonally adjusted basis, and the analysts on wall street have decided that this is a good thing, because the stock market has immediately gone Green, i am going to explain why i personally disagree. The analysis later on in this video is the crucial bit so listen out for that, but so far today the s p 500 is up over one percent, as i'm recording this video and many grow stocks have jumped up considerably in early trading, and there is a Reason why the stock market is rallying the accepted narrative is that the numbers in this cpi report are indicating that inflation is slowing down all by itself, as if by magic, mainstream media went out with notices that inflation may well be transitory and is topping out within Seconds of the data coming out, so i'm guessing that didn't actually analyze it and this line was clearly fed to them before the data was released. The problem is that i just don't agree with that interpretation of the data and i'm going to explain why.

If we look at the report, the one number that everyone got very excited by is this one in the middle, the all items less food and energy index, and that one is only up 0.3 month a month and 6.5 on an annual basis and many financial analysts And commentators will point to it and say that this number is a great indicator of what is actually happening with inflation and that number is slowing down. So perhaps inflation is as well, because energy markets have been massively disrupted with the spike in gas and oil prices. In march, we can see that by the way energy went up 11. Just within march, gasoline and fuel oil went up 18 and 22 within the month, and the annualized figures for the energy are just insane.

The average is at 32 percent and the argument is that food is susceptible to energy price impacts and also carries more supply and chain impacts than some of the other parts of the index. So if you go and strip them out to try to understand what is really happening, then you get that real measure of inflation and that real measure is only up 0.3 and much that's pretty low. As far as these numbers go - and it indicated this - inflation is actually going away. Well, i will disagree with that.

The problem is that i think people massively misinterpret what the 0.3 actually means, because if you look at the constituents, the components of it and actually go and analyze the numbers, it really doesn't look so pretty commodities other than food and energy are down. New cars are just 0.2 and used, cars are at minus 3.8 and those factors are what is disproportionately driving the all items, less food and energy index down, because every other number is actually higher than the average. But here is the problem. These factors don't really have anywhere near the same level of impact on short-term affordability of cost of living, especially for those on lower wages, buying a replacement car and the price of gold are not what's causing people to have to choose between feeding their family or heating.

The house, so here is the stuff that actually matters apparel is up 0.6 within the month. It's coming down from the december january highs, but still running higher than the average of that particular part of the index. Transportation services are up two percent within the month. This is going to be partly due to the energy price by compartment due to the ongoing driver shortages, among other things.

But here is the big ugly elephant in the room. Shelter, shelter is up 0.5 and 5 on a 12-month trading basis and shelter has a 33 weight in the total consumer index. But if you can strip out that energy and food bit from the total, then the shelter makes up over 41 of that all items. Less food and energy part of the index, so the price of shelter, is kind of like a big deal.

Shelter is the indicator of how much rent and mortgage costs are going up, and this indicator, unlike many others, doesn't actually track any real data. It tracks equivalency data based on surveys, and things like that. The way it is carried out means that it lags the increase in the underlying cost significantly. According to data from zumper, rent prices in the us are growing at more like 12 to 14 per year, and they have been growing at that level for a while.

According to the cpi report, rent is only up four point: four percent year and year, so roughly, where that rent increase chart was in june last year. According to the saint louis fed house, prices have been growing at 14 a year over the last 12 months and if you look at other data sources, the numbers for house price growth seem to be considerably higher. But the cpi is only showing an increase of 4.5 percent and that does kind of make sense, because people don't go out buying houses or moving every year. So, naturally, even if the selling prices or the rent prices and new rent properties goes up significantly, that spike doesn't affect every family.

So naturally you have to wait some time for the exploding house prices exploding rents to reflect in the cpi index. When enough people have had to go out and actually go and buy a house or rent a new house and when their rent or their mortgage payments go up to the new higher levels. However, if you look at the detailed sub-category breakdowns in the cpi report, you'll also see that the lodging away from home bit is up 6.7 in march and 25.1 percent over the last year. This number has been yo-yoing, but this is a much more realistic indicator.

A much more current indicator of what the combination of property prices and wages is doing, and this is where i just don't - share the confidence that the stock market seems to have about those numbers. The 8.8 annual increase in food prices alone is the highest since 1981.. The report itself tells you this and even the relatively low oil items less food and energy. That is only a 6.5 percent is still the highest it has been since 1982., but the real problem for me is in this monthly data, because you see that in march the seasonally adjusted increase from february was 1.2 percent.

The seasonally unadjusted increase was 1.3, but inflation in february was at 7.9 percent. So how come? If inflation in february was at 7.9 percent - and we have gone up point three percent from then from february to march how come it is now only eight point: five percent. Why is the increase only no point, six percent, and that is because the eight point five percent - is an annual bit of data. So, every month the reference point that you were comparing it to moves along one month and then, when you look at the same figure from a year ago, that figure also has moved on from the figure from one year before that and so on.

And so on. That weird effect compounds so here's the thing that makes me feel a bit uneasy to strip out this weird compounding effect that makes comparing numbers difficult. Let's just look at the index itself. Instead of the changes to the index here is the chart of what that index is doing since january 2021, and you don't need to do too much math to see that the fact is that the month-on-month increases are growing and becoming more and more pronounced.

This is because, when we have a long period of consistent inflation that multiplies by itself, this year's inflation compounds with last year's inflation. That compounds with the last years before that inflation, so two years in a row of say 8.5, for example, would be much much much worse than just a single month of running at an annual level of 8.5 percent. You can see this effect in the data, because that monthly increase is substantially higher than the increase in the overall index from february to march and the more discrepancy there is the more of that compound effect that you're seeing and it is the monthly increase that people Actually feel in their pockets. So what's the prognosis? This is the analysis bit well.

Energy prices have recently been coming down. Oil is down since the peak in march, but it's still trading at 99, as i'm recording this video, which is still historically a very high level. And if you look at the chart over the last few months, if oil continues sitting at the same level, it is still about a third more expensive than it was in just october and november last year, which wasn't very long ago. So if the price just remains at the same high level due to sanctions and the uncertainty around russian supplies and the bans that are apparently coming from europe, if it just remains in the same place, without even going up we're in for a relatively long period of The energy component of the cpi being very high, dragging the rest of the index up with it, and there are signs that the wage inflation spiral is now also taking off very worrying signs.

Wages have started to increase at a staggering rate in the last three quarters. With the employment cost index up at 7.1 percent in q4 last year, we're going to get updated numbers in a few weeks. The employment cost index is probably the best indicator of the actual increase in wage cost. So you can see the signs here that the spiral has now taken hold and the problem is that when this spiral starts, it is very unusual for it to go and come right back down by itself, and by unusual i mean it has never happened in history.

Ever because the spiral becomes a self-propelling tool, inflation is up so workers demand and require higher wages to be able to just afford to live, to be able to pay their bills. Higher wages means that it costs companies who employ those people to produce their products to offer their services. Those companies have to pay more, so they have to increase prices on their products and services, and then the workers can't afford the products and services again and ask for an increase in wages, and you can see how that spiral, self propagates and can get very bad. Very quickly, transitory inflation is a bit like that campfire that will eventually burn itself out and die if you leave it overnight, but this inflation wage spiral is the wind that goes and blows that fire onto the nearby trees and causes a huge destructive forest fire.

That goes completely out of control. Now this report keeps referencing 1982 and 1981 as the last time when inflation figures were this high, and that is because the last time we had an inflation spike that peaked in 1980. It was on its way down through 1981 and 1982, but that spike really started in 1978. This is what the month, by month, version of the all items index looked like at the time.

You can see that the increases in inflation looked remarkably similar to what we're seeing in the data today and inflation broke. That 8.5 mark that we're seeing today, somewhere between september and october 1978 and the next four months. Inflation actually sat pretty flat, and i bet that if we see the same thing happen now, if that was to happen today, the stock market would go absolutely bananas. We will be hearing new stories about how inflation has stopped out and the fed will declare immediate victory.

Saying inflation is transitory after all, but zoom out, just a little and inflation went on to hit 14.8 percent in march 1980 about a year and a half after it was at the same level that it is today except back. Then they were actually trying to reduce inflation as it was increasing. That is a really big point, because back then the politicians and the fed bosses didn't go and stick their fingers in the ears and pretend that inflation would just go away, because when inflation was breaking the 8.5 mark back, then the us interest rates were already at 8.75 percent, above where the inflation was at the time they were not at 0.25 percent that we have today, and that is because history, and literally any economic textbook that you want to read, will tell you that you have to stick interest rates to be higher than The rate of inflation in order for those interest rates to push the rate of inflation down as inflation flatlined at around 9 in q4 1978, so did interest rates. They were sitting at around 10 percent.

The going theory was that the interest rates were high enough and actually having an effect, but then, a year after they were at the same point that we are in today in terms of inflation. At around eight and a half percent inflation went and broke 12 percent, and the increases in inflation started becoming very concerning month to month, and that is when paul volcker, who was the chair of the federal reserve at the time, went absolutely ballistic and increased its rates. First, to about 15 percent and then a little bit later, all the way to 20 to stop people in the us needing wheelbarrows to carry around their wallets. Now today we have all the hallmarks of the inflation wage spirals, starting.

We have inflation increasing at remarkably similar rates to what we saw in 1978, but our interest rates are historically low levels and not increasing at any noticeable pace. The last monthly increase of a quarter of a percent was less than half of the amount by which the annual inflation rate went up and five times less than the within the month rate of inflation that we saw going from february to march. And that is not really going to do anything. My concern is that there is far too much politics and bravado going on things like midterm elections and other shenanigans that should have nothing to do with us.

Monetary policy are, in fact, having directly a massive effect on monetary policy. The us government is also in a bit of a pickle having printed an ungodly amount of money since the start of the pandemic, and the debt situation means that increasing interest rates sharply could have a catastrophic effect on the federal government being able to manage the economy. At all, and we would have an increasing risk of a currency crisis and a major recession coming. The problem with is that every month that the fed dallies and does nothing the can is just kicked down the road and every time it gets kicked down the road.

It gathers up a bit more dust and sand and becomes heavier making the next kick that little bit harder until you can't kick it anymore sure addressing the problem and actually doing something about. It requires very careful thinking, very careful political and economic management, because the situation that we are seeing ourselves in is very serious, but burying your head in the sand like an ostrich, hoping that the whole thing will just pass all by itself seems like an incredibly pathetic Way to treat the worst level of inflation that we have seen in over 40 years, if you found this video useful, please make sure you go and hit the like button for the youtube algorithm. Thank you so much for watching. I really appreciate it and i'll see you guys later.

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