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PREMATURE CELEBRATIONS: HOW THE NEXT PRESIDENT WILL REIGNITE INFLATION

Charles Sizemore


Chief Investment Strategist, The Freeport Society


August 16, 2024

The latest consumer price inflation (CPI) numbers came out yesterday… and given
that the results will go a long way to determining whether the Federal Reserve
cuts rates following their meeting next month, the financial press took note. 

Only… one of these headlines is not like the others. See if you can spot it… 

> “The Inflation War Has Been Won…”
> 
> Forbes



> “U.S. Annual Consumer Price Increase Slows to Below 3% as Inflation Ebbs”
> 
> Reuters



> “Inflation Falls Below 3% for First Time Since March 2021”
> 
> Yahoo! Finance



> “‘I’m down to eating ramen’: Social Security benefits aren’t keeping up with
> inflation”
> 
> CNN

This wasn’t exactly a hard quiz. 

So… what’s the story? 

Is inflation really falling? 

And if so, why doesn’t it feel like it is?

Five words have the answer…


LIES, DAMNED LIES, AND STATISTICS

We’ll start with some basic facts. 

The headline inflation number did indeed drop below 3% for the first time since
2021, finishing the month at a 2.9% clip. 

Core inflation, which strips out food and energy, came in a little higher at
3.2%. But that’s still the lowest number we’ve seen in a long time. 

Great!

We’ll take what we can get. And I’ll never complain about falling inflation. 

But let’s also put those numbers into perspective… 

A core inflation rate of 3.2% is a lot better than the 6.5% we suffered through
in early 2022. But that doesn’t mean it’s ideal or even tolerable. And it’s
still a full 50% higher than the Fed’s target of 2%. 

There’s a lot more to unpack here.

To start, what we’re experiencing is disinflation, which means a slowing of
inflation. That’s not the same thing as deflation, or falling prices.

Prices are still going up, albeit more slowly than a year ago.  

Unfortunately, prices rarely ever go back to where they were a few years ago… or
even a few weeks ago. Price hikes are almost always permanent.

But there’s more going on here. 

The CPI is an average. It’s designed to give us a quick and dirty idea of how
quickly average prices are rising. That doesn’t mean that all prices are rising
at exactly 3.2%. There are plenty of pockets of the economy where prices are
running at a much faster clip.

Take services, for example. 

The costs of services not related to energy, everything from dog grooming to
brain surgery, rose at a 4.9% rate in July. In fact, services inflation has been
running consistently hotter than goods inflation all year, and there’s a reason
for that. Services are people-intensive, and we’re still in the midst of a labor
shortage driven by the retirement of the Baby Boomers. 

That’s not something the Federal Reserve can kill with a few rate hikes. As I
discuss in a recent video presentation, the only way to really fix a
demographic-based labor shortage is with productivity-boosting technology. 

That’s coming, of course. That’s what all the AI hype is about. 

Investors and the mainstream media may be throwing a party because CPI came in
cooler… but the rest of us are tightening our belts, shopping more at Walmart
(WMT), and eating more Ramen noodles.

There are the statistics and there’s reality. Separating them is a wide canyon.
When ordinary citizens hear the cheers, they get angry… and even distrustful of
a media reporting stories that are wildly disconnected from their everyday
experiences.

What do you do about it? 

You invest smartly. 

Invest in cash cow companies that pay dividends. 

Invest in businesses that are chaos-proof… those like Walmart, as an example. 

And absolutely have dollar hedges in your portfolio.

As we barrel toward the November 5 presidential election, this will become even
more critical.

Here’s why…


THE GOING GETS HARDER FROM HERE

Dollar strength has kept inflation somewhat in check. 

Money tends to flow where it’s treated best – to countries with the highest real
interest rates. 

After the Federal Reserve raised interest rates to 5.5%, money started flowing
out of Japan and other lower-rate countries into U.S. dollars, helping to push
the greenback to multi-decade highs. 

But the Fed is planning to start cutting rates. So this situation is likely to
reverse. This unwinding of the Japanese yen “carry trade” is what roiled the
markets last week and may be a taste of things to come.

Why does that matter? 

Because, for all of President Joe Biden’s and Donald Trump’s efforts to reduce
our dependence on China and other “frenemy” trading partners, the U.S. still
imports a lot more than it exports. Last year, the trade deficit was close to
$800 billion. 

A strong dollar makes imports cheaper… which helps to keep a lid on inflation. 

A weaker dollar does the opposite… so, as this unfolds, we’ll have a new
inflationary headwind to look forward to. 

Sure, inflation is falling. Prices aren’t going up as fast as they were in
recent years. We should be happy about that. 

But we should also be realistic. The going gets harder from here, and each
additional 0.1% decline gets tougher than the one before it due to these
demographic and monetary headwinds.

I go into more detail in this video presentation, but here’s what it boils down
to:

Build a financial moat around yourself to buffer the insidious and ongoing
effects of inflation. It’s one of the best ways to ensure you don’t need to
resort to eating only Ramen noodles every day. 

To life, liberty, and the pursuit of wealth.


WRITTEN BY CHARLES SIZEMORE

August 16, 2024
Learn more

Charles Lewis Sizemore is a market veteran of 20-plus years. He holds an MSc
Finance and Accounting from the London School of Economics and a BBA in Finance
from Texas Christian University in Fort Worth. He is a keen market observer,
economist, investment analyst, and prolific writer, dedicated to helping people
achieve financial freedom through smart investing.


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