New INFLATION Data Is Red Hot (Uncut) 02-15-2025

New INFLATION Data Is Red Hot…Are Prices About To Skyrocket Again?

The inflation data just came in and a lot of experts are saying it is red hot. Hotter than expected inflation data from the labor department showed U.S. prices rose by the most in nearly a year and a half. So this begs the question, is inflation back? Are we going to see a re-acceleration of consumer prices like we saw in 2021 and 2022? And oh, by the way, are tariffs going to make the consumer price inflation even worse? I’m going to reveal the answers to you in three simple fast steps.

Step number one, let’s go over this red hot CPI report that just came out. And by the way, the PPI, the producer price index exceeded expectations as well. But let’s look at this chart.

We start at 2025. We go all the way back to 2020. On the left, we go from 0% up to 10%.

This is the CPI and the core CPI. And now it excludes the volatile. They can never say it excludes food and energy.

They always have to say it excludes volatile food and energy. I don’t know why it’s like a script that they all use. But anyway, getting back to it here, this red line indicates the CPI.

The blue line is the core. So for the most part, they’re kind of working in lockstep, but the CPI goes up to a greater degree and then down to a greater degree. I guess that’s why it’s volatile.

And so why don’t we start with the CPI? Because that’s what everyone focuses on. Prior to 2020, we’re right around 2%. Then we get the Cervasius sickness.

As you would imagine, it dips down probably right around almost zero. And then we go straight up to a point where it peaks out at around 9.1%, if my memory serves me well, in the summer of 2022. And then it goes straight down.

Now, this doesn’t mean that prices were going down. I know this gets confusing for a lot of people, but it doesn’t mean that the rate of change was going down. So here, prices are still going up, but they’re just going up at, let’s just say 3%, if you believe the CPI, as opposed to 9.1%. So we call this disinflation, not deflation, because that would imply prices are going down.

But disinflation is prices going up to a lesser degree. 2023, then we kind of flatten out here a little bit. And then we dip down to 2.4% and the Fed starts dropping rates, oddly enough.

And then we go right back to 3% year over year, which still is low considering the 9.1. But again, this begs the question, is this the start to a new acceleration in consumer prices going back to 9%, 10%, 11%, 12%? A lot of people are saying this looks exactly like the 1970s when we had this big wave of inflation at the beginning, and then it kind of goes down and then it goes right back up until Volcker had to break the back of inflation by jacking Fed funds rate up to, what was it, 18%, 19%, almost 20%. But the key here, that’s why I put key right here, for me, isn’t necessarily the year over year number. Like we said, 3%, it’s really a month over month.

The market expectations were for 0.3%. There’s still a significant increase, but we saw a 0.5% increase. That’s why all of these experts are calling this CPI report red hot. So, what was the market’s response? As you would imagine, the 10-year Treasury skyrocketed.

It goes up by, at one point in the day, it was up by 11, 12 basis points, and it came back down to maybe eight or nine basis points. But I want to point out that since the Fed started dropping rates, and since we’ve seen the CPI go from 2.4% up to 3%, during this timeframe, approximately, the 10-year Treasury yield has gone up by almost 100 basis points. I think we started right around 3.7% or so, 3.8%. It goes all the way up to 4.8%, and then it came down to maybe 4.5%, but then it rocketed right back up over 4.6% when we had this CPI report that was much higher than market expectations.

So, that’s what happened, but now, more importantly, we have to get into what’s likely going to happen in the future, and then at the end of this video, we’re going to discuss whether tariffs will exacerbate the problem, or maybe they’ll bring inflation down. Who knows? You have to wait to the end of this video to find out. Step number two, now let’s go over the probabilities of inflation getting a lot worse throughout the rest of 2025.

To start, I want to look at a chart of actually 2007 and 2008. I think you guys are going to find this fascinating. Most of you know from watching my videos, the Fed started the last rate-cutting cycle, with the exception of the Cervasus sickness, in September of 2007, September 18th, oddly enough, and the Fed funds rate when they started cutting was, oddly enough, 5.25%. Of course, hopefully, you guys are getting the joke.

It’s the exact same starting point and the same date that we had this go-around, but back then, the CPI was quite a bit different when the Fed started cutting rates. It was right around 3.5%. Now, as the Fed cut rates, what do you think happened with the CPI? Keep in mind, this is right as we are going into the biggest financial crisis since the Great Depression in the United States, so you would assume that the CPI would have gone down. I mean, everybody knows that in 2009, it actually went negative for a quarter, but this would be very counterintuitive.

Look at this chart and you’ll see the red line go up to the point in the middle of 2008, call it June, July, the CPI had gone from 3.5% all the way up to 5.6%, an increase of over 2% while we were in a disinflationary, if not deflationary recession, the worst one since the Great Depression, but during that time frame, again, the CPI went up by 2%, so I’m not saying right now 2025 is going to be 2008, but what I am saying, staying on the topic of this video, is just because we have seen the CPI go from 2.4% up to 3%, it doesn’t necessarily mean that we are in the next wave of a re-acceleration of consumer prices similar to what we saw in the 1970s, and oh, by the way, you can see by looking at this chart what happened once the CPI got up to 5.6%, it went straight down to negative 2%, like we said earlier, in other words, 2% deflation in 2009 for one quarter. Now, a lot of people would make a great point and they’d push back and say, George, well, what you’re missing is all of this money printing we have had. I mean, in 2020, 21, 22, as money printer go brr, we all remember that meme, that gif with Jerome Powell, he’s like this, all the money is spraying out there, and obviously, we didn’t have that leading up to the GFC, so you’re just comparing apples to oranges.

You can’t say that, well, because it played out this way in 2008, it could play out this way in 2025 as far as consumer price inflation, because you’re leaving out the elephant in the room, that big X factor, which is the growth of money supply. It was almost unprecedented during the Cerveza sickness. Okay, well, that’s a great rebuttal, but let’s go back in history and look at the facts.

So let’s start by looking at the few years prior to the GFC to see what played out with M2 money supply, and then we can compare that to what has happened, these unprecedented levels of money printing that we have seen since 2020. We’ll use the exact same time span. So looking at this chart, we go from right around June or so 2003 to April 2008, and M2 money supply went up by 30%, 30%.

Okay, so you would expect that if you look at 2020 to 2025, you would see maybe an increase of 130%, maybe 200%. I mean, again, money printer was going burr, but actually we saw an increase of 38%. At the end of the day, in my view, that’s not enough to make a significant difference between what we saw leading up to the GFC and what we’ve seen since the Cerveza sickness leading up to today.

So what we have established is the lead up to the CPI going from 2.4% up to 3% is not necessarily unprecedented, and we have seen this play out where we did have disinflation or actual deflation after we saw that CPI go up by a much more significant degree. Remember, we’ve only seen it go up by 60 basis points. Back during 2008, we saw it go up by 200 basis points before we eventually had disinflation and deflation.

Now, I want to be clear, there are no certainties, there are only probabilities. So what we’re trying to do right now is we’re trying to look at all variables, all the data, all the facts, and then do a thorough analysis as to what the probabilities are that we see a re-acceleration of consumer prices like we saw during the 1970s. And on that note, I want to ask all of you the question, why did we have such high consumer price inflation during 2021 and 2022-2023? It’s because two things.

Number one, we had the STEMI checks going out, which increased velocity. We did have that result in a dramatic increase of M2 money supply, and the government’s destroyed global supply chains. They locked everyone in a cage, for heaven’s sakes, for two years.

Well, that’s going to be fewer goods and services as you’re increasing aggregate demand with people that have a higher propensity to spend. Therefore, that velocity increases. Of course, you’re going to have consumer price inflation go up.

But to get a re-acceleration, we would have to see that movie all over again. And as you can tell by looking at a chart of M2 money supply, we’re actually down over the last two years. We have not seen anything near what we saw that created the consumer price inflation to begin with.

And if anything, knock on wood with these tariffs, the global supply chains have gotten a lot better. So I don’t see any evidence for a repeat of what caused the significant consumer price inflation to happen to begin with. And this is great news.

Step number three. So my base case is we will not see a re-acceleration of consumer prices like we did in the 1970s, where we go from the CPI 3%, 5%, 7%, 9%, 12%. But at the end of the day, there are no certainties.

There are only probabilities. So this is my best guess. But at the end of the day, nobody really knows.

So now let’s tackle the question of the Trump tariffs. Will this provide a tailwind to consumer prices? Well, we start by looking at a chart of the DXY. This is the dollar versus a basket of other currencies.

We’ll use it as a proxy for pretty much all other fiat currencies. Today’s date, going back to August, 2024, we go from 95 up to 110. And you can see we kind of flatline, go down a little bit, but it’s still over 100.

And then we shoot all the way up to about 110. We’ve come down more recently to around 108 or 107. So why is the dollar so important when we try to figure out what the average Joe is going to have to pay for stuff at Walmart, Home Depot, Target, if Donald Trump enacts these tariffs? Well, let me go ahead and explain.

This guy is not the average Joe. No, no, no, no, no. But he is the average Joe’s Chinese cousin.

That is right. Everyone’s favorite Chinese manufacturer, the average Cho. And he’s got his really cool Chinese hat here.

And of course, he’s got his Fu Manchu. And he is creating widgets that he is selling and exporting to the United States. He’s selling them to his cousin, the average Joe buying them at Walmart, Home Depot and Target.

Let’s assume for a moment right now, the yuan, which is the Chinese currency, is the exact same as the dollar. Now, it’s not, but we’re just using this for the sake of the example. So one yuan equals one dollar.

Got it. But Cho’s cost for his widget is 75 yuan. So he wants to make 25 yuan per sale.

So he’s charging $100 for his widget at Walmart, Home Depot and Target. And again, he wants that 25% margin. That’s really what he’s looking for.

So he doesn’t really care if he’s getting $100. What he really cares about, and this is the key, is that he is getting 100 yuan. So then Donald Trump comes in here and he says, we’re going to put in a 100% tariff on everything from China.

Okay, fine. So let’s assume for a moment the dollar goes from one yuan to two yuan. It’s appreciated in value, just like we can see in this chart.

So what that allows the average Cho to do is actually drop the dollar price of his widget, let’s say down to $50. Because then when you add Trump’s 100% tariff, it’s still selling at Walmart, Home Depot and Target to the average Cho at the $100 original price. But you see what has happened is now Cho’s going to take these $50 and exchange them into yuan.

And because the dollar has appreciated in value, based on these numbers in the example, he’s still going to get his 100 domestic currency units that he needs to have that 25 yuan profit margin. So if the dollar continues to get stronger, and that’s a big if, then this could offset the tariffs. So the stuff you are buying that’s being imported from XYZ tariffed country isn’t increasing in dollar price.

Now let’s assume for a moment the dollar doesn’t continue to appreciate. Let’s assume it goes down or it just stays the same. Well, I still don’t think the tariffs would increase the cost of an overall basket of goods in the United States.

Here’s why. Would it increase the price of the stuff that is coming in from the average Cho, Walmart, Home Depot, Target? Absolutely it would. But the average Cho’s paycheck isn’t likely going to go up at the same rate.

Therefore, he’s going to be left with a choice. If he allocates more money to buying the average Cho’s product, then what’s going to happen is he’s going to have less money to spend on other things. So you have this robbing Peter to pay Paul that I always talk about, where you have economic activity actually decrease.

So yes, it is true prices would be going up over here, but they likely would be coming down over here. So when you look at the entire basket of goods, prices don’t go up as much as the actual tariff. So now let’s get over to that breaking news that I talked about earlier.

The 10-year treasury, like we said in step number one, went way up after that red hot CPI report. But today, just one day later, I noticed as I was recording this video, the 10-year treasury yield dropped right back down to where it was prior to the report. So the 10-year treasury yield seems to be agreeing with what I was saying in step number two, that my base case isn’t that we go from 3% consumer price inflation, as measured by the CPI, straight up to 10, 12, whatever we saw in the 1970s.

And another thing I’d like to add is a lot of experts out there say that the Fed is too loose. They have monetary conditions too loose. That’s why inflation is going up.

But this doesn’t really make a lot of sense to me, because like we said in step number one, the 10-year treasury over the last, let’s just call it four or five months, has gone up by 100 basis points. And this is the most important interest rate in the real economy. It isn’t necessarily the Fed funds rate.

So my point is we really haven’t had loosening monetary conditions. Monetary conditions have actually tightened while the Fed has dropped by 100 basis points. So the main takeaway is we have seen the CPI go from 2.4 unexpectedly straight up to 3%, but I don’t think this means we’re right back into the 1970s.

And as far as the tariffs, although it could increase prices over here, I don’t think it increases the prices on the entire basket of goods. And if the dollar continues to go up, this could offset the tariffs that Trump puts in place. For more content that will help you build wealth and thrive in a world of out of control central banks and big governments, check out this playlist right here.