If you’re wondering what the noise was, it was the Fed’s “transitory” explanation doing a big fat face plant after June’s inflation data were released.

Headline annual CPI came in at 5.4%, the highest print since June 2008 and the second highest since Nov 1990. The 0.9% MoM print (headline and core) was also the highest since June 2008. Core CPI, at 4.5%, was the largest increase since November 1991.

Importantly, the data reveals that although energy prices might have led the charge to these lofty levels…

…inflation is now both widespread and endemic.  Most categories increased by at least 4% YoY and nearly all categories increased in June at an annualized rate of over 4%.

continued for members…

Naturally, interest rates soared, right?  Not exactly. The Fed is still very much managing the bond market’s reaction because the Fed is the bond market.

Likewise, stocks didn’t crash – at least yet.

The Fed is limiting the stock market’s reaction because, by managing eliminating a fear response, it is telling investors algorithms that there’s nothing to worry about. VIX might have popped up above its SMA20 for a few minutes, but look for it to settle back to UNCH or even negative on the day any minute. Oil and gas – no longer the obvious primary sources of inflation – are holding up just fine and still on the brink of breakouts.

And, USDJPY is still bouncing – albeit in backtest mode after a trend breakdown.The dollar is strengthening a bit against the euro, but it’s unlikely to make a big move yet with Powell’s testimony still to come later this week.

Even gold and silver are unfazed. And, BTC is actually lower.

It’s nothing new, folks. From all appearances, sky-high inflation is no big deal.

So, why is a taper on the way?  First of all, because James Bullard – the Fed’s biggest dove – says that it is. He’s advocating for at the very least a taper of the Fed’s mortgage purchases. “I am a little bit concerned that we’re feeding into an incipient housing bubble,” he said. “We did get into a lot of trouble with a housing bubble in the mid-2000s and it—and it caused a lot of damage to the economy, so I don’t think we need to be feeding that here given the situation.”

Second, core inflation is way above trend. This has always been the Fed’s way out – admit that inflation isn’t so bad when you back out food and energy.  At 4.5% YoY and 0.9% MoM, that argument doesn’t work.

Third, most mainstream economists and talking heads agree that the Fed must taper. I heard Jeremy Siegel of Wharton – who never ever disagrees with the Fed about anything and is the biggest bull in the universe – say that the Fed must begin tapering or risk runaway inflation.

The stunning growth of debt over the past several years has made lower interest rates for the foreseeable future necessary. There is no alternative. There are two ways to accomplish this: manipulate interest rates through open market purchases (the current approach) or decrease inflation – starting with oil/gas prices. The Fed has little ability to affect any other category of inflation. I’ll therefore reiterate my expectation that oil/gas prices are in for a downturn – the sooner the better.

I am working on an updated chart of the interplay between rates, debt and interest expense as well as one dealing with soaring real estate prices. Hope to get them posted tomorrow.

GLTA.