CPI Inflation Index: will Friday’s report show that Inflation continues to increase?

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On Friday, November 10 the U.S. Bureau of Labor Statistics will release its most current report on inflation for November 2021. Inflationary pressures have spiraled out of control and since June have consistently been at or above 5.3%. Currently, economists are forecasting that Friday’s report will show that inflation has increased by 0.7%. If that is correct it would take the current inflationary rate year-over-year to an alarming 6.8%. That level of inflation has not been seen since the 1980s. The real question is how accurate have previous forecasts been in projecting upcoming reports?

According to investing.com, in July economists anticipated that inflationary pressures had risen to 4.9%. The actual numbers indicated inflationary pressures of 5.4%. In August economists predicted that the July inflationary level would come in at 5.3%, the actual numbers were 5.4%. The only forecast that was precisely accurate occurred in September and predicted that the inflationary pressures for August were 5.3%, which was correct. The October report came in at 5.4%, just 0.1% above the forecast of 5.3%. However, analysts deeply underestimated the growing level of inflation when they anticipated that the October CPI inflationary index would come in at 5.8%, the actual numbers were 6.2%. This is the highest level since November 1990.

If the forecast for November is accurate it means the U.S. will experience an inflation level that is the highest in the last 40 years.

Unquestionably, Friday’s report will shape changes in the current monetary policy of the Federal Reserve. They have already alluded to that fact to soften the shock factor if they announce that they will accelerate the tapering process, and foresee multiple interest rate hikes next year. The FOMC meeting will conclude on 15 December and at that point market participants will see the most current interest rate hike projections vis-à-vis the dot plot. Analysts are speculating that there could be three or more rate hikes next year.

But that brings up the 800-pound gorilla in the room. How can the Federal Reserve effectively reduce the spiraling level of inflation to an acceptable level, with their target at 2% without having a dramatic and deep impact on the economic recovery? How many rate hikes will be necessary to bring inflation levels down to acceptable numbers? If we have an inflation rate that is close to 7%, how do you reduce that by 4% or 5% without creating a recession as a byproduct of rapid rate increases?

The Federal Reserve will try to balance the economic damage resulting from interest rate hikes while simultaneously reducing the inflationary pressures at these record levels. Even if they are successful this is a process that will most likely take years not months, which is why we could see gold pricing reacting in a bullish manner even with the knowledge that the Federal Reserve is about to embark on an aggressive round of rate hikes. The rationale behind that statement is that no matter how aggressive the Federal Reserve is it will take at least a year to normalize interest rates. Lastly, what will the new normal be in terms of a target for inflation?  We will gain more clarity on Friday when the actual numbers come out. However, it will be the statement and dot plot released on December 15 when the final FOMC meeting for the year concludes before we gain real insight into how the Federal Reserve plans to deal with one of the greatest challenges in the last 20 years.

Wishing you, as always, good trading and good health,

Gary S. Wagner - Executive Producer