The Headline Inflation Numbers are a Lie

This year, we’ve seen varying decisions from the leading central banks across the world. The ECB, Swiss National Bank, and Sweden’s Riksbank are just a few of the central banks that have decided on lowering borrowing costs this year.

Meanwhile for the United States, the Federal Reserve hasn’t decided on interest rate cuts. In fact, the opposite. In March, policymakers were forecasting three rate cuts this year. Now, the Fed’s median projection is only a single 25 basis point reduction in 2024.

Since 2022, we’ve seen 525 basis points of interest rate hikes.

What’s happening?

In short, inflation is still an extremely prevalent problem. The Fed is aiming for a 2% inflation target over the longer run, as measured by the annual change in the Personal Consumption Expenditure (PCE) Price Index. The latest Core PCE data showed a +2.8% YoY change.

This upcoming week, on June 28th, we will get a new PCE reading.

The Truth about Inflation

The core PCE Index shows the annual inflation rate is at 2.8% and the core CPI Index shows an annual inflation rate at 3.4%. However, the real inflation rate is much higher.

Everyday items have became increasingly expensive and consumers are feeling the pain.

Notable price changes (year over year):

• Crude Oil futures have increased +15.74% YoY

• Poultry futures have increased +19.61% YoY

• Cheese futures have increased +20.66% YoY

• Rubber futures have increased +27.90% YoY

• Milk futures have increased +33.71% YoY

• Butter futures have increased +37.29% YoY

• Orange Juice futures have increased +62.26% YoY

• Cocoa futures have increased +174.57% YoY

Note: The core PCE and core CPI Index exclude food and energy prices. To account for food and energy prices, look at the headline figure.

The Secret Indicator

Historically, gold prices have been a good indicator of inflation and market sentiment as investors tend to flock to gold as a hedge against inflation.

In May, gold prices hit an all-time high of 2450.05 per troy ounce. Since then, the price of gold has held steady and hovers around that all-time high price.

Like anything, the price of gold is primarily driven by supply and demand. As demand for gold has increased over the past year, the price of gold has skyrocketed.

• The price of gold has increased +20.99% over the past year

From 1971 to 2024 gold has had an average annual return of 7.98% (Statista).

With the Federal Reserve lowering its guidance on interest rate cuts and the price of everyday items being inflated, the underlying outlook on inflation doesn’t appear as optimistic as the headlines you may see. While the Fed has made progress in the fight against inflation, the battle is far from over.