Inflation Could Really Be Double Digits And Will Keep Rising - Shadowstats' John Williams - 09-18-2023

Looking at the month of August. This morning we had a headline CPI that came out at 3.7% year over year, my estimates up at about eleven and a half percent. And had those changes been made, not been made between 1980 and the early 2000s, they'd be 40 with CPI of around eleven and a half percent right now. CPI numbers came out today on Wednesday, and it looks like headline CPI ticked up yet again to now 3.7%. Core CPI has continued to fall now down to 4.3%.

We're talking now with John Williams. He is a publisher of Shadowstats.com, and we'll be talking about his measurement of what inflation could actually be. It may actually be much higher than it is today, his outlook on inflation, what's been driving inflation, and his outlook on economic growth. John, an honor to host you. Big fan of your work.

Thank you for joining us today. Thank you for having me. First, talk about what happened last month. With inflation ticking up slightly to 3.7%, what's your initial reaction to today's BLS report and the numbers that they released? What do you think drove inflation?

Well, underlying the inflation has been very heavy money creation by the Federal Reserve that's underlying it. But the variability that we've seen over the last year or so has been largely tied to oil prices and gasoline prices rising and falling. Specifically, if you look back at the pre election environment, a year ago, inflation, inflation was rising and the administration opened up the Strategic Petroleum Reserve and liquidated part of that to create a better supply of gasoline, which helped to bring gasoline prices down. And they also exported some of that which helped to boost the net exports and get the GDP up. While coming into the election, they drained about half the reserve and that pretty much continued into January of this year.

But now, from what I can see, it is not being drained. And you're beginning to see some reversal of those numbers as the markets responded. The big factor today in the upturn in the CPI was rising gasoline prices. And you've got much higher gasoline prices ahead. The gasoline prices came down before the election that gave you lower inflation coming into the election.

But gasoline prices are on the rise again, you can see them. Just to follow up on what you just said, why do you think there will be higher gasoline prices ahead, bringing the system back into balance in terms of supply and demand? Again, what the administration did was they took artificial means to flood the system with gasoline. That's pretty well worked out. Now we're going back to the older supply circumstance which will push the gasoline, it'll narrow the supply of it's narrowing the supply of gasoline and pushing gasoline prices higher.

Do you have an estimate or an idea of what the equilibrium price of oil should be?

What I'm looking at in the pricing here is generally how it gets translated into the US. Gasoline prices, I think you'll be another 10% higher the next two to three months. Okay, so going back to your inflation outlook, I didn't mean to interrupt you. So your outlook on inflation that I'm guessing is also going to be higher because of your outlook on gasoline. Well, in terms of the headline CPI.

But if you look at the way the Federal Reserve looks at the numbers, if you listen to the Fed Chairman, when he's outlining where things stood, he said that we had an overheating economy that was driving inflation and he was raising interest rates in order to kill the overheating economy and to kill the inflation. This is early on in the Fed's cycle here. Now, you had an economy at that point which was already tanking or had tank. The pandemic had hit, economy was in recession. We're heading back into recession even with the official numbers.

So that to say that the economy is overheating and they were raising rates to cool off the economy and that would help bring down inflation, that certainly helped to cool off the economy because the economy has continued to weaken since then. We're in a deepening recession. You're not seeing growth in any of the major economic indicators except the GDP, and even that's beginning to falter. We are going to talk about your recession outlook and your economic assessment, but I want to draw the viewers attention to your work on shadow stats. You provide what the site describes as alternative data or alternative charts, and in particular, you followed inflation for quite some time using a metric that they used to use and they no longer use.

So can you please just describe, first of all, your methodology for making this calculation and second, what your findings are for what inflation should be? Should we use these metrics? Sure.

What happened? And I'll contend that the headline CPI is about as good a measure you can put together of inflation as you had it up until the early 1980s. What happened in 1980 is all of a sudden you had a surge in consumer inflation, much as we had a year or two ago. Here where the Congress had set up a cost of living adjustment for Social Security recipients. They realized all of a sudden they were going to have a big dent in their budget for the next year because the amount of adjustments made to bring the Social Security recipients up to speed with inflation was going to be quite meaningful.

And what they did, instead of doing anything per se to reduce inflation fundamentally, they worked to redefine the series. And they so instructed the Bureau of Labor Statistics Catherine Abrams, who's then the head of the BLS, had in her memoirs that said, gee, if only you could find a way of using this way to approach and calculate these numbers, we might be able to find more money for the BLS. It was clearly aimed at changing the methodology, reducing the numbers, and effectively not being fair to the people who would go in on Social Security with the belief that their cost would be covered in the future. For rising inflation, the first thing the government did in its readjustment, one of the biggest single components was in housing. And it used to be that you'd have a measure of the cost of owning a house, but they redefined that as homeowners equivalent rent, where the government determined what the average homeowner would pay himself to rent himself his own house, and then they would estimate how much he'd be increasing the rent on himself going forward.

And then that was their inflation measure. And right up front, that knocked one and a half percentage point off the headline CPI. And the government's been very open about that. Every time they make a change, they explain what's happening, they estimate its impact. And all I've done is, I've taken the standpoint that the government should have left its methodology in place and done other things to balance things.

The people who came into the system and what they came into the system with is what I estimate. That's where the inflation measure is today, as I'm measuring it. Had they not made all these changes, and they've made a number of changes from 1982 into the early two thousand s the first decade of the 2000s, aggregate differential is up around eight percentage points at this point. So that it's.

I restate it as though they had not made those interim redefinitions because it's not on a consistent basis in reporting. I'm trying to report it as consistently as I can with the way it would have been. So that right now, looking at the month of August this morning, we had a headline CPI that came out at 3.7% year over year, my estimates up at about eleven and a half percent. And had those changes been made, not been made between 1980 and the early 2000s, they'd be reporting with CPI up around eleven and a half percent right now. Even by your own measurements, the CPI has been coming down since its peak from last year.

John, is that primarily again because of the falling oil price? Yes, a lot of it's due to the falling oil price.

In fact, the oil prices probably have been the single biggest component there in terms of the volatility. But in terms of the high level that you're living with here, that's primarily due to the money supply. The variabilities with the oil price, the general magnitude is due to the money supply. Now, do you think that the money supply will at some point revert back to positive growth? The M two money supply has been contracting on a year over year basis, as you know, over the last year and a half.

Is there some point in which that could reverse in the next maybe twelve to 24 months. You think it's possible? The Fed can do a lot here. If they want to bring the inflation under control, they need to bring the money supply under control. What you're seeing with the broad money supply right now, the M Two is down about 4% year over.

Excuse me. Yeah. The broad money supply is down about 4%, I believe, year over year. So it actually has shrunk some. But the narrow measure is up about 4% year over year.

And it's not just the year to year change there, but what happened in that first year. When you're looking at the tremendous liquidity that was pumped into the system at the end of that first year after the pandemic hit, the most narrow measure was up something like 120% from where it was before. Year over year, the broad money supply, M Three, was up something like 43%, 44%. Year over year. That's unheard of.

But since then, as you go from year over year against the big disruption the year before to the next year, where all of a sudden your year ago was also at an elevated level, all of a sudden the year to year change comes back in line. So what we had is effectively a balloon of money growth in that first year following the pandemic. And all that cash that was surged into the system to prevent systemic collapse is still there. Do you think that the Federal Reserve may have overtightened monetary policy and contracted the money supply too much? No.

Let me put it this way.

They need to get the system back into balance.

It's very difficult to do this in a painless manner.

I don't see an easy way out of it for it. If they want to have a stable economy and a healthy banking system, it's difficult at present. The economy right now is contracting. If you look at things ingestion inflation, look at things such as retail sales, industrial production, the construction area, even the unemployment numbers turned negative last month. You had a jump in the unemployment rate.

That's showing a troubled economy. It's not booming the GDP year over year, it was heavily gimmicked by this oil deal. If you took the oil out, you'd had two negative quarters of GDP back in 2022. The last half of 2022 would have been negative except for the oil gimmicks. And we're now at the brink of probably turning negative again with the headline GDP, unless they start playing games again with the oil, which I don't think they can afford to do, given the depleted level of the petroleum reserve.

So it's not a stable circumstance. You don't have a booming economy. You never have. And it wasn't overheating. The Fed talked of raising the rates to kill inflation, but it needed to provide liquidity to the banking system and profitability to the banking system.

The banking system is fragile so that the higher rates, they have better margins. And with the money supply. They have liquidity which they need, but the money supply has not been meaningfully altered to try and contain the inflation. They didn't worry about the inflation initially. They knew it was going to be a side effect, but they were more worried about a systemic collapse and they prevented a systemic collapse.

And my hats off to them on that. Now, John, I like to play a clip of President Biden making a speech about the labor market. I've showed this to a few economists and I've gotten various responses. I like to get your response to this 1 minute clip, so I'm just going to play it for you. Please take a listen.

Sure. My predecessor was one of only two presidents in history who entered his presidency and left with fewer jobs than when he entered. Look, look at where I are now. Just this morning, we learned that the economy created 190,000 jobs last month. All told, we've added 13.5 million jobs since I took office, around 800,000 of them manufacturing jobs.

We created more jobs in two years than any president ever created in a four year single four year term we did in two years. What's more, when I took office, the unemployment rate was 6.3%. The nonpartisan Congressional Budget Office predicted that it would not get below 4% until the end of 2025. Now, unemployment and unemployment rate has been below 14% for the last 19 months, the longest stretch in over 50 years. We recovered all the jobs lost during the Pandemic.

We've added a million more new jobs. More than 700,000 people joined the labor force last month, which means the highest share of working age Americans are in the workforce now than at any time in the past 20 years. Absolutely not. That's nonsense.

First of all, he has people working with them who play with the numbers. But when he came into office, you were sort of at a nader and you had the collapse of the Pandemic in terms of the employment. So coming off what is the worst employment collapse in modern time? And having one of the greatest jobs gains and boost is not surprising. It's all relative.

The unemployment rate is not too meaningful, and let me explain why. Because I started off with the CPI, because I wanted people to have an honest report on what was happening to inflation. But the government has changed the way it does things with other numbers, including employment, unemployment, and the GDP. So I look at the way those numbers have been changed, and one thing that you'll find with the unemployment is the way that it's defined.

The headline unemployment rate is simply the count of the people who are out of work, want a job. And if you're out of work but you're not actively looking for work, you're not counted as unemployed. So that's the headline unemployment rate. And that got real low under President Trump, and it got real low here but now you're seeing that rise. There are broader measures, and I look at the broader measures as being more meaningful because people get discouraged.

There's no work to be had, and so they stop looking. They're called discouraged workers. If you haven't looked for work in the last, I think, six weeks, you're not generally not counted as unemployed. But if you weren't looking because you didn't think there were any jobs to be found, they'd count you as a discouraged worker, but they only count you as a discouraged worker for a year. After that, you're no longer counted.

If you look at some of the amazing jumps in the numbers here, what you'll find is that with the extraordinary gyrations that the employment numbers and really all the economic numbers have gone through with the Pandemic, you have some unusual things. And the first anniversary where people would be discouraged from working, or candidates discouraged workers because of the Pandemic, no job to be had, afraid to go back to work.

All of a sudden you have a sharp drop in the broader unemployment rate because they're just defined out of existence the way the unemployment rate is estimated with the payroll numbers.

That's an estimate based on what companies are actually doing in the way of payrolls. And those numbers, after a year or so, when they have hard numbers in hand, are probably the most accurate employment indication out there. But in between, you get all sorts of variations in Gyrations with the surveying and other games that are played. But the reason that the unemployment rate is as low as it is is that you have a lot of people who consider themselves to be unemployed but are not counted as unemployed because of the definitions and timing. And part of that is due to distortions that came out of the Pandemic.

The numbers that you're seeing with any of the economic statistics here have been knocked all around with the effects of the Pandemic. You wrote in a commentary earlier in the month that you think that the Federal Reserve wanted to trigger a recession, and it looks like it has succeeded. You said, starting here with the headline graphs on unemployment. Although the upside movement in the unemployment rate is minimal, the longer term plot shows it has started to take on the shape of something that was last seen with the Pandemic collapse in 2020. I think the general question would be whether or not, based on your calculations, the unemployment rate already indicates we are already in a recession.

Yes, it does.

The broader unemployment rates have been rising with me, but you'll see that in the last couple of months that the actual level of the unemployment rate has gone higher. Now, mine is a broader measure than the other ones because I include basically long term discouraged workers. That's a much higher number than the government has. But the government in the headline numbers, you get counted as unemployed only in the headline number, only if you're actively looking for work, then if you're you want a job, you're actively looking for work. If you've been looking for a job and got to work and there are just no jobs to be had at the moment, you're not looking, they don't count you.

And there are different degrees at which they measured going to their broadest measure, which is a U six, which after three months of discouragement, maybe six months of discouragement, they just don't count you anymore. So what I'm looking at those numbers and the patterns there, and the broader measures which the broader measure that I have, my broader numbers are getting as bad as they've ever been. And you look at the patterns of deterioration, the broader measures are getting worse. The headline numbers are getting worse. And that is to me an indication that the economy is weakening, not getting better.

I think the average consumer or a person watching this is wondering to himself or herself whether their standard of living is going to change in either way going forward into the next twelve to 14 months or 24 months. Given your outlook on inflation, given your outlook on economic growth or deterioration, what do you think?

I'm looking at a deteriorating economic circumstance, which will probably mean some deterioration in the quality of life and people's incomes depending on their employment circumstance.

The Fed has moved to kill the economy as much as it can by raising interest rates and it's having its effect. But the economy was already sinking. It was not exploding. It was not booming as the Fed was advertising. They were using that as an excuse for the inflation and why they needed to raise rates.

The reason they raised rates was to give the banks a better business environment. And the reason they flooded the system with liquidity was indeed to keep the system afloat, to keep the, the banking system afloat, to keep the banks set with liquidity. But it is that inflation, it's a money supply. Extraordinary growth. There big, big bulge now.

Yes, it's not changed much year over year since last year, but last year it was up 120% in the most liquid area. And that bulge is still there. And that's what's driving the inflation. We had an upturn in the inflation today.

That's due to two factors. One, again, just an underlying inflationary environment. But secondly, you had the variability of the gasoline prices, and that's going to go up and down, but the gasoline prices were catching up closer to reality. Do you anticipate the unemployment trend that you've just talked about to continue, which is to say unemployment will continue going up? I'm looking for the economy to continue to slow.

Know, either the federal government or the Fed gets more clever than they have been, but they're both right now doing everything they can to not necessarily deliberately to effectively stimulate inflation. The Fed, with its money supply growth, and we'll see if they cut back on that. They've leveled off. But again, you still have the bulger. The federal government just eliminated the debt.

So you're going to get an increasing flow of federal government spending on top of what the Fed's been doing here. And with the net result that you're probably going to see higher inflation, but the wages are not going to keep up with the higher inflation. So it's going to be a weakening economy for the average person. A final point I want to bring to your attention is a great wealth transfer that is to be expected over the coming decade. Currently, the baby boomers, people born between 1946 to 1964 hold the majority of wealth in America.

And as time passes, they're expected to transfer this wealth to the younger generations, the Generation X's millennials, and the youngest generation, Generation Z's. What does this wealth transfer mean for, first of all, asset prices, and second, just the economy overall?

Well, I would expect the impact to be very slow. Whatever impact it's going to be, you're already in the process of people just don't you don't lose five years of people overnight. It's a very slow process.

It I would not see that as destabilizing, probably stabilizing because it'll be, you know, the wealth to the extent the wealth gets transferred to the next generation, the next generation will have new uses for it that will presumably be put forward in a positive manner.

I don't see any real negative implications. I would say it's generally positive. It's a normal cycle. How much you end up putting people on Social Security or such, that may be another issue because that's going to be increasingly expensive. No limits on it.

Now, my problem is I think you're going to see a very uncontrolled circumstance with the government, with the Federal Reserve in the next year or two. When I say uncontrolled, rapidly spending money that the government can't pay off. The Fed has already created a tremendous amount of money that it's very difficult for it to pull out of the system. Both those areas are debasing to the US. Dollar, meaning higher inflation.

And I think we've got real risk of the inflation problem getting out of control here in the next year or two. Yes, that's what I was wondering, whether or not, again, going back to the wealth transfer, whether or not it has any long term implications for inflation, which is to say, have you noticed any differences in spending patterns between the older or younger generations? Well, the younger generations will tend to spend it on more near term needs, but the younger generation ages as well. I don't think there's going to be enough shift in the demographics in the next, let's say five years versus the last five years. It would make a marked difference in the other areas that are right now gyrating out of control.

But yes, that's an ongoing process and it helps the younger generations, helps their liquidity. Final question. You said that the inflation rate has the potential to go out of control.

Nobody knows for sure, but do you have an estimate as to what would be a reasonable level of inflation in the future, given your calculations? Well, today we had something that's historically it's, you know, we're still at levels that are high historically. In fact, we got up to levels last seen back in the beyond.

I don't think we're going to get back to 1% inflation again for a long time. I think where you are now is probably going to be the near term bottom. And with the way the Fed is still pumping up the system, it doesn't have an easy way of getting that cash out of the system. That cash is all sort of underpinning things as they are.

I think you're going to see the Fed will continue to not withdraw the money supply. Probably it's going to have to put some more in. As the economy continues to weaken, they get their desired recession and then they supposedly want to get out of it. That's all complicated on the federal government side where you now have unlimited government spending which has to be funded.

I think in order to contain the inflation, the Fed really needs to cut back its money supply growth severely. If you get back to where you were before then that's got to be done over five years or something. You may have a circumstance that will stabilize, but where it is now as that gets worked through, I think you're going to see the or as they attempt to work through it, I think you're going to see increasingly higher inflation, headline inflation.

It's higher now than they're reporting. So I'm guessing then you don't think the Federal Reserve will cut rates anytime soon, given that inflation will not come down anytime soon. Well, they could cut rates if they wanted to stimulate economic activity, which doesn't necessarily mean inflation, but they seem to be playing it that way.

What the Fed has done here primarily has been to keep the banking system afloat. They're owned by the banking system.

The banks need to be able to lend money. They need to be liquid, they need to be able to make money in lending money. And the things that the Fed's targeting here is aimed at keeping banking system solvent and in place. If they lose the banking system, you're going to end up with a new economy, new banking system. Such well if you don't expect the inflation rate to return to 2% in the future, in the foreseeable future, can we then expect the Fed funds rate to stay elevated at around 5%?

Is that the new norm? Of course that has implications for our credit card rates, mortgage rates, all other interest rates. Well, I think the Fed concluded that it had interest rates too low and I think they want to have a shift higher in basic interest rates. I don't think they're not going to go back down to where they were, but I think they may well go higher as they try to contain things here. It's not stable.

They don't have things in balance. The pandemic is extraordinary. The extraordinary magnitude had extraordinary effects, extraordinary reaction by the Fed. The Fed doesn't have a way of unwinding it. They're trying to they want to keep everything as stable as possible.

But number one, keeping the banking system stable because that's their primary baby. That's what they're there for. If they lose the banking system, you have all sorts of economic chaos. So it's they're they're gonna I don't think they're gonna let the money supply get back as low as it was. They'd like to see the interest rates permanently higher than they've been historically.

They've been extraordinarily. So it'll whether they can get it there or not while keeping the system together is another matter.

Thank you very much for a very thorough interview. John, where can we learn more about your work in ShadowStats? There actually is a website, Shadowstats.com. It's been around for 20 plus years, and it was on a web host that back in August went out of business with little notice and had to move it moved the site, but everything was sort of antique in its writing and such. Right now I've got a site either go to WW Shadowstats.com, it's got all the archives in it.

You can see what I've written in the past, but it's very difficult to interact with. So I'm setting up a new site. It's got to be rewritten, but everything that I've written, what I put on the way of commentary, graphs, I publish alternate data, numbers on inflation, unemployment and such. The subscribers are all getting that by email link. So if anyone's interested, just drop me a line at Johnwilliams @ shadowstats.com.

I'll send you the details. I'll send you a sample of what I put out. And I offer two subscriptions at varying lengths. One year at $175.06, months at $89. Excellent.

Well, we'll put the links down in the description below, so make sure to follow John and Shadow stats. Thank you very much again, John, I appreciate your time. Dave, thank you very much and thank you for watching. Don't forget to like and subscribe to this channel.