How to See the Future of American Inflation

Posted On 27 May 2022

Last updated on April 6th, 2024

Inflation. Not only is it a hot topic lately, inflation itself is running hot! We were told that inflation needed to be a bit higher – 2% is what the Federal Reserve was aiming for. When they overshot their target, we were told not to worry, that the higher inflation was just transitory. Now, the Fed is saying that this inflation may be around for a while.

Since the Federal reserve controls the country’s money supply, they should know what is happening! Why does their story keep changing? Is there a way that we can see what inflation will be in the future?

The way that the Fed is handling things makes me wonder what is really happening. How can an organization filled with people with PhDs not know how to run an economy? Here are some interesting thoughts on what is happening.

The Fed

If you look at the leaders of the Fed, most have spent their whole career in the Fed, government, or education. While they are smart people, they do not have “Main Street” business experience. Main Street is where the workers are. Main Street is also where the day-to-day business is transacted and what drives the actual economy. Wall Street has a very different view of the economy. Wall Street has its place, just the two are very different from each other.

Reading Bill Bonner’s insights into the economy, he makes an interesting point. The country could be trying to inflate its way out of debt. That way, the debt is accumulated with higher value dollars, and paid back with lower value dollars. If this is what the Fed is up to, inflation will be with us for a long, long time.

Let me get back onto my topic. How can we, ordinary people, see what lies in store for us with inflation? This method is quite simple. Keep reading to find out how to see the future of inflation in America.

Product Supply Pipeline

The easiest way to picture what is happening is to look at all our products as though they flow through a pipeline. Goods flow from raw materials to industrial products to consumer goods.

When the governments shut down the global economy due to the pandemic, I don’t think they foresaw the supply chain issues that would be caused. That is not the main cause of this inflation we have now (although it sure helps!).

So, goods flow from raw materials to consumer goods. If the cost of something increases for goods going through that pipeline, we can expect to pay more for those products as they come out of the pipeline.

What Goes in Must Come Out

Let me use oil as an example. Oil goes in one end of the pipeline, and then comes out the other end of that pipeline. If it costs more to pump the crude oil from the ground, the cost of the crude oil will be more expensive. When the refinery receives crude oil at a higher price, the refined products (like gasoline & diesel) will cost more.

As the wages paid to workers increases, it can add even more to the inflated price. Let’s start with a look at the prices of goods entering the pipeline.

PPI In

PPI, or the Producer Price Index, is the measure of the cost of industrial goods sold to companies. This is not the number used when inflation is generally talked about. The reason this number is not used for the inflation rate is because it is not something that consumers see when they purchase goods.

Businesses can absorb some of the increased costs of industrial goods. If there is a small change in the PPI, consumers don’t see a price change. When the PPI increases either significantly or steadily, consumers will eventually see the prices increase.

Because manufacturing takes time, and there is shipping and warehousing before the products reach the store shelves, there is a time lag before the increased PPI shows up in consumer prices.

CPI Out

CPI, or the Consumer Price Index, is the number used when the inflation rate is talked about. The CPI (inflation rate) is the price change from a year earlier. The price of both food and energy are not included to make the number “more stable”. This is crazy because food and energy are essential for us to live.

Since CPI is what comes out of the product pipeline, we can look at the PPI to get an idea of where prices are headed. If the PPI is higher than the CPI, we can expect higher inflation in the future. The numbers for April 2022 are PPI: +11.0 and the CPI: +8.3.

Results May Vary

The numbers do not line up exactly and as I mentioned, there is a lead time between PPI and CPI. The PPI tends to become the CPI number in about 6-9 months! I find this method of looking at inflation more reliable than listening to the experts. We can still listen to them, the thing is that they don’t know the future, either.

Remember, the government can subsidize prices. The lead time can change. No one knows what the future holds in store. As most economists will say, “We can expect this particular thing to happen.” Then they tell about what can happen before they include, “On the other hand…” President Harry Truman said that he would like to have a one-handed economist!

Speaking of economists, have you ever wondered why there are no rich economists? If they really know what is going to happen, shouldn’t they take advantage of that information and invest accordingly? I would think so.

This idea that PPI leads CPI is reliable enough for me to attempt to see the future. For those of you out there that don’t care for all the “noise” on the news, I hope that this helps you make some sense of what is happening with inflation in this country.