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What do high interest rates and inflation mean for the economy and precious metals?

Jeffrey Christian and Sean Brazney
August 15, 2022
Video Transcript

p>Sean Brazney: Hello my name is Sean Brazney, Sales Director for Monex Deposit Company. I’m here today with Jeffrey Christian, Managing Partner and Founder of CPM Group, one of the many analysts over there at CPM Group, as well as, the author of our Precious Metals For More Than Just Inflation report. Thank you for being with us today Jeffrey.

Jeffrey Christian: It’s good to be with you guys.

Sean Brazney: Now, our most recent report actually just came out in July. I love your lead-in at the very beginning. It talks about interest rates, inflation, and economic growth right off the bat. I’m going to isolate a little bit of this back towards inflation, as we got the CPI print today, and we saw the CPI print month over month come out at 8.5% and the year over year missed its estimate by just a little bit at 5.9%. They were expecting 6.1%. After the report, we saw some market movement that makes it look like some peak inflation in the market. I’m hoping that you can share with us some of the details out of that report

Jeffrey Christian: A very interesting CPI and before we talk about the July document. I’ll just say, that one of the things that we saw with the June CPI, which was very worrisome was that we had big increases in virtually every component of the CPI prices in June. Everything was up, and they were up not only year over year, but month to month, from May to June. What I think we explained at the time, was that what you were seeing was all of those other segments of the economy were playing catch-up with the food and energy that had started to rise much more sharply. Now, looking at today’s CPI data for July, it was much more mixed. We saw core inflation, basically flat, month to month, actually it was up sharply month to month, but basically flat year over year. The headline inflation which includes: food and energy, actually was coming down, and then if you take out the food and energy and you look at those other components of the core inflation, less food and energy, nothing was rising sharply, about half of the components were declining, .1% to .5%, and about half of the components were rising about .1% to .6%. So, what you’re starting to see, is, yeah, it looks like we are at or are approaching peak inflation both on a month to month and a year over year. You’re starting to see that a lot of the inflation numbers that have been problematic for the last 15 months seem to be disappearing. One of the pockets that we saw of relative weakness was the cost of food eaten away from the home, and what we had seen in 2021 and the first half of 2022, was a lot of restaurants were raising their prices sharply. A) to try to make up for all the lost revenue during the lockdown and also because they were having to pay their workers more to get them back, and what we’ve seen in July is that that was cooling off or leveling off, and I think that’s a good sign. So, the inflation figures presented a mixed picture, a complex view of a complexed economy and that yeah, it sent up the prices sharply for a while and then the prices came back off. It sent up interest rates in the debt market briefly and then they’ve come off now too. So, I think the markets are having trouble digesting a complex explanation in what’s going on in what’s really a very complex economy.

Sean Brazney: We’re well above the 2% Fed target on inflation. I keep hearing investors talk about the Fed pivot. This doesn’t look like any kind of Fed pivot any time soon, do you think?

Jeffrey Christian: You know, if you look at mainstream economists and what they’ve been saying, they’ve been saying that they could see a period where the Feds stops raising interest rates, possibly as early as late this year, but probably in the first quarter of next year and then possibly lowering interest rates in the second and third quarters of next year as we see the economy mature more and the risks, their perceptions of risks of a recession increase, and that’s exactly what we are seeing. So, the CME has a target interest rate probabilities contract and you contract that and you can see that, whereas we had a 1% increase in interest rates followed by a 75 basis point increase. For September, the consensus about 58%, I think, are saying that they expect about a 50% basis point increase in September. So, they’re still expecting interest rates to rise, because inflation is still high and it’s still far above that 2% target range. Although the Fed has said, “Well 2-3% would be acceptable to us at this point”, but yeah, there is still inflation present in the economy, there are still inflationary problems that have to be dealt with. I think we’ve talked in the past about some of the inflationary factors were cyclical, but some of them are secular and long-term issues and those things are going to be much more problematic to deal with. Then if you look at future things, you see the consensus in the mainstream, as reflected by the CME target rate probabilities schedules, you see 50 basis point probabilities increase in September, and then when you get into November it’s maybe 25 basis points, and then December, I think, they might be talking about another 25 basis points as most likely, but then after that its flat for three or four months. It’s now flat through May and then it actually starts coming down probabilistically in June. Now, a month ago the pivot to lower interest rates among mainstream economists was that it might start in May and now they’ve rolled it to June, but that’s a far different cry from the fearmongers in the gold market who were saying the Fed can’t raise interest rates, it’ll bankrupt the treasury, and it’s going to have to start lowering interest rates in July or August or September, and that idea of an imminent reduction in interest rates is pretty much discredited now, and the more likely view is, yeah, we’re going to bump along economically with high inflation, rising interest rates, and a maturing economic recovery with a very nasty political environment compounding in the difficulty of the government to manage its fiscal policies and that’s going happen, that’s going to continue for the next year or so, before we probably see a major change.

Sean Brazney: Yeah, with high inflation, it really feels like I’m losing quite a bit of buying power and it sounds like that’s going to hang on for quite a while and still makes me think that one more wonderful reason to be holding precious metals. The report that we put out, Precious Metals For More Than Just Inflation is a free report. It’s brand new out in July. We also have another one that I’m going to hint towards for our viewers coming out that you’ve done, Real Reasons To Own Gold, which again dives into a lot of these different topics. A little teaser for our viewers out there. I wish I could have you every day and talk over this stuff, but it looks like I’ll get you for the rest of the year at least and we’ll have many more opportunities to talk about this. Thank you for your time Jeffrey.

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