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The Producer Price Index, a measure of what manufacturers charge wholesale markets for their finished products, jumped 8.3 percent from August 2020 through last month, the U.S. Labor Department reported the largest annual gain since the agency began tracking the number in 2010.
The index, a measure of inflation that has yet to reach consumers, rose 0.7 percent in August from July. The index gained 1 percent in each of the previous two months, indicating that the pace of inflation might be beginning to slow.
Food prices shot up 2.9 percent in August after falling in July, contributing to the 12.9-percent rise in food prices over the past 12 months.
TREND FORECAST: As we noted in “Inflation Pressures Rising” (20 Jul 2021), while inflation is spiking, real wages are falling. For example, when the consumer price index increased 5.4 percent in June, real average hourly earnings fell 0.5%, despite a 0.3- percent increase in average hourly earnings.
However, the Bank of England, the European Central Bank, Germany’s Bundesbank, and the U.S. Federal Reserve all continue to insist that current high rates of inflation are transitory and do not yet require higher interest rates, although all have said they will tighten rates if further data shows the need.
Also, the sentiment on The Street, which we disagree with, is that the danger of a long-term inflation spiral remains low.
There are too many variables in flux to make a long-term forecast now. Indeed, when the markets crash, so too will many prices. However, to re-inflate failing economies, central banks and governments will re-flood the markets with cheap money, which will in turn lower the value of their currencies—and the lower the value of a currency, the more it costs to buy products, driving inflation even higher.
Indeed, in the U.S., the $3.5 trillion dollar spending package before Congress is just another example of governments flooding the markets with cheap money printed on nothing and backed by nothing that will artificially and temporarily push economic growth higher… while fueling inflation and sinking the value of the currency lower. Thus, the lower the value of the currency, the more it costs to purchase products and services… the higher inflation rises.