How Much Longer Can We "Hide" The Inflation?

0:00 Late last week, the official consumer price

0:02 index inflation figure rose to 4.2% year-over-year,

0:05 the highest annualized rate seen since the postcoid price surge of 2022.

0:09 This by itself was not a great result.

0:12 Even though these official numbers really

0:14 just confirmed what most people already knew, things are getting more expensive.

0:18 But what they didn't capture is what is likely to still be coming down the pipe.

0:23 Last month, the producer price index,

0:25 which tracks a basket of items that businesses

0:27 use to provide goods and services to consumers,

0:30 saw its largest single increase in the last decade,

0:32 with the only exception of a single

0:34 month at the height of post-pandemic inflation.

0:36 Now, the reasons are pretty obvious.

0:38 Fuel prices trickle through to almost everything that needs to be transported.

0:42 Sprinkle in persistent tariff uncertainty, market consolidation,

0:46 and a lot of resources being redirected towards data center

0:48 buildouts instead of providing service

0:50 infrastructure to regular people and businesses.

0:52 Now, eventually these companies will either be forced to accept

0:55 lower profit or just pass these higher prices along to consumers,

0:58 which will ultimately be a decision made for them

1:01 by how much more those consumers can financially bear.

1:03 Again, not exactly surprising stuff anymore.

1:05 And if anything, the cost of living crisis we are currently experiencing is

1:10 arguably not as bad as wider economic

1:12 conditions might suggest, for now at least.

1:15 But the implications of these numbers are worth understanding because they are

1:18 likely to mean a lot more than just yet even higher prices.

1:22 This kind of inflation is putting a new Fed in a very difficult position.

1:26 The logical move would be to raise interest rates.

1:29 But that runs the risks of sweeping out the last leg holding up the economy,

1:33 which is the stock market.

1:35 A stock market that is already gearing up

1:37 to digest three mega IPOs in the next few months.

1:40 The other options involve either sacrificing the American consumer,

1:43 the American worker, or the American dollar.

1:46 The other unfortunate reality worth keeping in mind is

1:48 that no matter what we do with our financial levers, we can't print more oil.

1:52 And any price increases from here are going to be on top of a cost

1:56 of living level that was already forcing a lot of people to go without.

2:00 Are you concerned, Mr.

2:01 President, about the latest inflation number which came out this morning?

2:04 Could that be a No, I love it.

2:06 The numbers were right.

2:07 You know what I really love?

2:09 I love the inflation.

2:10 spending all of that money on housing,

2:13 food, child care, transportation, health, and taxes.

2:16 There's nothing left over.

2:17 And it's hard to imagine that if I'm making $120,000, I'm barely making it.

2:22 The numbers at the gas pumps keep going up.

2:25 539, 559, and 579.

2:27 This is ridiculous.

2:28 We went from 3 to 5.

2:30 Domestically, we've got about 216 million barrels of gasoline available to us.

2:35 That seems like a lot, but 190 million barrels is considered critical.

2:40 Okay, so inflation has clearly been creeping up,

2:43 and that's on top of levels well above what would be considered optimal.

2:47 But for now, at least, there are, or at least were,

2:49 a few things that have been shielding us

2:51 from the full effects of just how unaffordable things have become.

2:55 The first of those sacrificial shields is

2:57 that we have been burning through inventories.

2:59 In early 2025, companies stocked up on anything

3:02 and everything they could keep in their warehouses.

3:04 mostly in an attempt to get ahead of tariff disruptions.

3:07 And where possible, they have just been using their stock

3:10 piles to keep prices competitive for as long as they can.

3:13 In the first quarter of 2025 alone,

3:16 businesses added around 172 billion worth of inventory,

3:19 which according to government GDP data

3:21 was the largest quarterly inventory buildup

3:23 outside of the pandemic recovery in records going back to the 1940s.

3:28 This obviously doesn't apply to perishables that can't be stored indefinitely,

3:32 but specifically things like component parts

3:34 and other goods were piled up in bulk.

3:36 Small businesses didn't have a warehouse to do this.

3:39 So mostly this has been a benefit to larger retailers and B2B suppliers.

3:43 A big box retailer could fill distribution centers

3:46 with a year's worth of patio furniture before the tariffs landed.

3:49 The local warehouse buying through a distributor

3:51 got a few extra weeks stock at best, which was kind of part of the plan.

3:56 For big companies, this was an opportunity to run anti-competitive pricing

3:59 without actually running anti-competitive pricing.

4:01 Because in theory, it wasn't their fault that their smaller market

4:05 rivals didn't order supplies before a 30% tax was slapped on everything.

4:09 Obviously, this isn't great, but for consumers and end producers,

4:13 it at the very least delayed price increases.

4:15 When the tariffs hit,

4:17 Goldman Sachs estimated that companies were only passing along

4:20 about a fifth of the cost increases to consumers.

4:22 A year later, their estimates put that figure closer to 3/4 and still rising.

4:27 Researchers at the Fed went a step further last month

4:30 and described what we are seeing now as uh full pass through.

4:34 So, that cushion is mostly spent.

4:36 We still don't 100% know what is happening with tariffs either.

4:40 The Supreme Court struck down the biggest batch of them in February,

4:43 but the White House has still been going back and forth on new

4:46 ways to get around these rulings and re-implement something in its place.

4:50 For now, since the first round of tariff rules weren't legally enforceable,

4:53 the government will at some point have to pay

4:57 back around $166 billion in refunds to about 330,000 importers.

5:01 Money that is unlikely to find its way back to consumers.

5:05 This refund process has been incredibly slow and administratively difficult,

5:09 which is again disproportionately impacting smaller businesses that don't have

5:13 the time or the manpower to wait for this cash.

5:15 There was also a lot of speculation around these rulings with certain

5:19 companies buying the rights to tariff refunds before they were confirmed.

5:22 They would go to businesses and pay them some money to write up a contract

5:26 that would entitle them to tariff refunds

5:27 if and when they were ever handed back.

5:30 One trade attorney at Foley and Lardner

5:32 reported getting hundreds of emails a day offering

5:34 to buy his clients refund claims with offers

5:37 that started around 20 cents on the dollar.

5:39 So yeah, apparently this is a whole industry now.

5:42 A lot of desperate small businesses took those pretty crappy

5:45 deals just to get some money back to make payroll.

5:48 The investors themselves have made 400% returns off

5:51 this desperation within the span of just a few months,

5:54 which is clearly how the free market ought to be working.

5:57 Now, arguably, these investment firms still accepted the risks

6:00 that these tariffs may never be paid back,

6:02 in which case they would lose all the money they paid to these businesses.

6:05 But it probably didn't help that the actual

6:07 architect of the tariff plan in the first place

6:10 also had direct interest in an investment firm

6:12 betting against the legality of those very same tariffs.

6:15 Now, even outside of particularly

6:17 egregious examples like that, this financialization

6:19 of government tools is making it

6:21 particularly difficult for smaller businesses to compete.

6:23 But the point here is that once inventories run dry,

6:25 we will be more directly exposed to the increased

6:28 prices to actually make or import stuff,

6:30 which at the moment is climbing about one

6:32 and a half times as fast as the headline inflation number.

6:35 Now, the reason why this pressure on small businesses is such a big

6:39 deal is because larger companies aren't going to cover this gap forever.

6:42 They have accepted tighter margins for now because they

6:44 realize that there is only so much consumers can bear.

6:47 But if smaller businesses are pushed out of these markets,

6:50 there won't be much competition left stopping major retailers

6:53 from passing along these input price shocks and then some.

6:56 So yeah, this inventory draw down has been

6:58 softening the inflationary blow for the last 12 months.

7:01 And that's the first layer of armor that has more or less been used up.

7:05 But within the last 100 days in particular,

7:07 there has been one inventory cash that we have been drawing on harder than ever.

7:11 And that's our strategic petroleum reserve.

7:12 So, it's time to learn how money works to find out

7:15 how much longer we can hide away the real inflation problem.

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8:24 Okay, so companies private stockpiles have quietly been absorbing

8:26 a lot of the price pressure for the last year,

8:29 but the one doing the heaviest lifting

8:31 right now belongs to the federal government.

8:33 The strategic petroleum reserve is quite literally a huge pool of oil kept

8:37 in four separate underground caves which is in theory made for times like this.

8:41 If we need a stabilized supply and by extension prices during unstable times,

8:45 we can draw down these reserves to put

8:47 more oil into the market and avoid huge swings.

8:50 It's pretty simple, but it won't last forever.

8:53 According to the Department of Energy's own numbers,

8:56 the reserve held about 411 million barrels at the start of the year.

9:00 As of last week, it was down to around 349 million,

9:03 sitting at under just half of its theoretical maximum of 711

9:07 million barrels after weeks of the largest draw downs in its history.

9:12 The rate at which we have been drawing oil from, it would be

9:14 fine if the conflict in Iran really did only last a few weeks.

9:17 But we are now more than 3 months in.

9:20 And despite recent peace talks,

9:21 there is still a long way to go before things get back to normal.

9:25 The US has committed 172 million barrels

9:28 to the coordinated international release and completing

9:30 that commitment would leave the reserve at its lowest level since 1982 directly

9:35 following the most severe oil crisis in history which for context took place

9:39 over 2 years to get to where we are now just after 100 days.

9:43 Now, another technical but important detail is

9:45 that we can't draw these reserves down to zero.

9:48 to maintain the cavern integrity of the locations

9:50 where we actually keep all of this oil,

9:52 we need to keep about 150 million barrels in there at an absolute minimum.

9:56 So, in plain English, at our current rate of draw down,

9:59 we are about 10 weeks away from hitting a hard limit on this supply cushion.

10:02 If this runs out, I truly cannot emphasize how we are.

10:06 Prices will flow through a lot more

10:08 of the economy than direct costs at the pump.

10:10 Almost everything in America is moved with diesel engines.

10:13 According to the American Trucking Associations,

10:15 trucks alone carried almost 3/4 of all domestic freight tonnage in 2024.

10:19 For consumer prices,

10:20 one of the sharpest recent movers has been the cost of air travel,

10:24 which was in turn caused by everything we covered in last week's video.

10:28 Jet fuel used in a 737 and diesel used

10:31 in a truck or a locomotive are actually surprisingly similar fuels.

10:34 They are both middle distillates pulled from the same part of the barrel.

10:38 So the increased cost of shipping yourself to Cancun is roughly

10:41 analogous to the increased costs of shipping anything else everywhere else.

10:45 Jet fuel prices have already doubled over

10:47 the last year according to EIA price data.

10:50 Regular diesel is up almost 60%.

10:53 Marisk, the world's second largest shipping company,

10:55 says the conflict is adding around $500 million a month to its

10:59 costs and that one carrier alone moves about 14% of everything you buy.

11:03 The International Energy Agency has called

11:05 this the largest supply disruption in the history

11:08 of the global oil market with around 14 million barrels a day still shut in.

11:12 If the strategic reserve here in America and other similar

11:15 reserves around the world can no longer make up the difference,

11:18 there is nothing left standing between us

11:19 and bearing the full force of that disruption.

11:22 Now, technically, America is a net fossil fuel exporter.

11:25 And the old team at Micro did a great video on why that unfortunately does

11:29 not really matter by actually tracing every

11:31 barrel of oil that goes through our country.

11:33 So I will leave a link to that video in the description.

11:36 But the most important TLDDR is that almost all

11:39 of our fossil fuels outside of the strategic reserve belong

11:41 to private companies that are just going to sell

11:44 to the highest bidder no matter where in the world they are.

11:47 With global supplies this short,

11:48 Bloomberg now describes American barrels as the supplier

11:51 of last resort for everyone else, which keeps our prices pinned to the global

11:55 crisis price regardless of how much we produce.

11:58 So fuel costs became everything costs.

12:00 I know this isn't exactly new news, but transport and energy isn't the only

12:05 limited resource suppliers are currently contending with.

12:07 And even if the war in Iran theoretically

12:10 ends tomorrow in its entirety with no ongoing consequences,

12:13 which is probably wishful thinking to put it mildly,

12:17 there are still additional headwinds against prices.

12:19 At the same time as we are dealing with energy constraints,

12:22 a lot of skilled tradesmen, energy components, materials,

12:25 and government attention has been tied up in building data centers.

12:28 Now we have already spoken endlessly about these projects

12:31 and their uh logical payoff but the point here is that they are a huge strain

12:37 on limited components like well everything from ram trucks,

12:40 ram trucks, tradesmen, concrete rebar,

12:42 commercial building equipment and most crucially electrical infrastructure

12:45 with a particular choke point being electrical transformers.

12:48 These little metal boxes could provide power

12:51 to local energy grids or a real factory.

12:53 Both of which would increase the supply

12:55 of essential services or consumer goods respectively.

12:57 Or they could sit in a warehouse waiting for data centers to go online.

13:01 And at the moment there is just more money supporting the latter option.

13:04 Now to play devil's advocate a bit here, if these projects do eventually deliver

13:09 the productivity miracle they are promising,

13:10 some of this spending will potentially have a deflationary impact.

13:14 But that is an optimistic outcome that may not be passed to consumers.

13:17 won't be for the more essential components of CPI like you know food

13:21 and energy and is unlikely to pan out for some time now if at all.

13:25 In the meantime, your transformer sitting in a warehouse

13:28 does nothing for your power bill this year.

13:30 Local utilities, for example,

13:32 are basically paying RAM prices to do routine maintenance on their grids.

13:36 Utilities report that transformers,

13:37 which do need to be replaced as part of ongoing grid maintenance,

13:41 now cost four to six times what they did before

13:44 2022 with waiting lists that can stretch out to 4 years.

13:47 And all of that is getting passed along to everybody,

13:50 even if there are no data centers directly

13:52 on your grid competing for that precious supply of electrons.

13:55 The same kind of thing is happening for skilled tradesmen.

13:58 Data center projects are paying electricians around

14:00 a 32% premium over traditional construction work

14:03 with specialized electricians in Northern Virginia

14:06 and Texas commanding up to $280,000 a year.

14:09 Obviously, that is an amazing opportunity for those guys and nobody

14:13 is going to begrudge them for cashing in while they can.

14:16 But the businesses building houses and factories are

14:18 having to compete on price for the same people.

14:21 A cost that will eventually need to be

14:22 passed along through higher housing or goods costs, respectively.

14:25 The country is already short around 300,000 electricians.

14:28 And in Texas, home builders say competition for them

14:31 is delaying housing construction by a couple of months.

14:34 Now, all of this is obviously not great,

14:37 but one of the biggest problems with fixing it is

14:40 that the cure is going to hurt almost as much as the illness.

14:43 The logical first step would be to end the war

14:46 in Iran and at the very least provide clarity on tariffs.

14:49 But we have tried that about 30 times now.

14:52 The most recent second signing of the Treaty of Versailles is

14:55 certainly the most noteworthy step towards bringing the war to a close,

14:59 albeit with significant concessions from America.

15:01 But it should also be noted that even if this peace deal does stick this time,

15:06 Hormuse tolls may still continue.

15:07 They will just be called environmental fees instead of tolls,

15:11 which it must be emphasized is exactly the same thing.

15:14 Although maybe it's better for Auron's ESG credentials.

15:16 So, in the meantime, while all of that is still getting worked out,

15:20 this is going to fall on the Fed

15:22 that really only has two tools at their disposal.

15:25 Sucking money out of circulation or raising the interest rates.

15:28 But these have their own problems.

15:30 If we raise rates, that means investors can get

15:33 better returns by just parking their money somewhere safe,

15:36 which might tempt a few more people to cash

15:38 out on an already very frothy investment market.

15:41 Why risk being on the wrong side of a bubble

15:44 when the 30-year Treasury will pay you over 5%,

15:46 effectively guaranteed more than it has paid at any point since 2007?

15:51 Maybe the market will offer better returns,

15:53 but even the most optimistic investors are seeing the warning signs.

15:57 This is especially risky right now because there's going to be an even greater

16:01 demand for cash as three IPOs and a major capital raise come from SpaceX,

16:06 OpenAI, Anthropic, and Google.

16:07 SpaceX, which listed this week,

16:09 raised $75 billion at a $1.75 trillion valuation,

16:12 which made it the largest IPO in history.

16:15 OpenAI confidentially filed for its own IPO just days

16:19 before that listing at a valuation of over $850 billion.

16:22 And Enthropic has already filed for its own at over a trillion.

16:27 Google has also announced plans to raise up to $80 billion in new equity,

16:31 which is kind of the thing that mega caps basically never do,

16:34 but it's been forced into continue funding its data center expansion.

16:38 These companies are all going to be holding their hand out

16:40 at the same time as the government is holding its handout,

16:43 offering better rates than almost any time

16:45 in the past 20 years for the privilege.

16:47 If the Fed raises rates or pulls money out of the market,

16:50 there is going to be even less cash

16:51 to go around amongst these hungry, hungry hippos.

16:54 This is why the market reacted so badly to this week's inflation announcement.

16:58 In theory, higher inflation should actually be good for the market.

17:02 Because people will naturally want to put their money into real

17:05 businesses as a hedge against the declining value of the dollar.

17:08 But because there is so much demand for cash,

17:10 any sign that interest rates are going to tempt

17:13 people to lock that cash up is really scary.

17:15 An even more perverse sign of the same paradox is

17:18 that the market is now really afraid of good jobs reports.

17:22 Last Friday, payrolls came in at almost double what forecasters expected,

17:25 which was the third month in a row, the number has beaten consensus.

17:29 Stocks and bonds both sold off because

17:32 traders immediately started pricing in rate hikes.

17:34 In a normal economy, lots of people getting new jobs should be a good sign

17:38 for businesses like the ones listed on the stock market, right?

17:42 More people with jobs means money to spend,

17:44 as well as being an indication that companies are confident enough to hire.

17:48 But we aren't a normal market at the moment.

17:51 Valuations are stretched so far that it would take decades of good

17:54 consumer spending to pay back a lot of the values we are seeing,

17:57 which is such a long time horizon that it has basically become irrelevant.

18:01 So what is actually happening is that good jobs numbers remove the one excuse

18:05 that the Fed could hold up to lower rates or at least leave them alone.

18:09 The Fed has a triple mandate to maintain stable prices,

18:12 stable rates, and maximum employment.

18:14 If employment is apparently really good and prices are going up,

18:18 then in theory they have no choice but to raise interest rates.

18:21 The brand new Fed chair, Kevin Walsh, who was only sworn in a few weeks ago,

18:25 completed his first ever policy meeting in the big chair

18:28 last week with exactly that combination sitting on the table.

18:31 Now, we have already made another video on why those job

18:34 numbers may not actually be all they really seem in reality.

18:37 So, I will leave a link to that below instead of going over it all again.

18:40 But the point is that as long as the job numbers look good,

18:43 at least on paper, and the inflation numbers look bad,

18:46 interest rates are likely to increase.

18:48 But okay, this is about inflation, not the stock market.

18:52 So, for the sake of this video, who cares?

18:55 Current stocks are overwhelmingly owned by wealthy

18:57 people who can theoretically afford the loss.

19:00 According to the Fed's own distributional accounts,

19:02 the wealthiest 10% of households hold

19:04 around 87% of household-owned corporate equities,

19:06 and the top 1% alone holds about half.

19:09 However, those wealthy people are the ones

19:12 currently doing a large share of the spending.

19:15 By Moody's estimates,

19:16 the top 10% of earners now account for almost half of all consumer spending,

19:20 which is the highest share in records going back to 1989.

19:23 A booming stock market makes these people feel good.

19:26 And when they see big numbers in their Schwab account,

19:28 they are more likely to splurge on goods

19:30 and services that provide opportunities to every other household.

19:33 But if Green Line does not go up, that could knock out the last leg that has

19:37 been holding up our economy for a long time now.

19:40 Both companies and wealthy households would stop spending on capex and luxuries,

19:44 respectively, eliminating the biggest growth sectors of the economy,

19:48 potentially causing an employment crisis just as bad,

19:51 if not worse, than the cost of living crisis.

19:53 Okay, so what if we just let inflation run hot?

19:56 Well, that has its problems, too, even beyond just higher prices.

19:59 The US dollar is already under stress as the global reserve currency.

20:03 Something that buys us extraordinary privilege in international

20:06 markets both for imports and for debt.

20:08 The dollar share of global foreign exchange reserves has slipped

20:11 to its lowest level in roughly three decades of IMF records.

20:15 And the dollar index briefly broke below 97 earlier this year,

20:19 back to lows it hadn't seen in years

20:21 before the war sent everything scrambling back into dollars.

20:24 If our dollar inflates away, we will start to lose that privilege.

20:27 Now, a cheaper dollar does make American exports more competitive,

20:30 which is why some people in Washington have openly argued for one,

20:34 but that math works a lot better when one of our biggest

20:37 imports isn't suddenly around 40% more expensive than it was a year ago.

20:41 Also, we are still a massive net importer of goods and services

20:44 that will get relatively more expensive if our dollar gets weaker,

20:47 compounding the problem of prices on shelves.

20:49 In the short term, if wages are adjusted upwards,

20:52 it may help smooth things over for a little while.

20:55 But realistically, it will just leave wage earners

20:57 further behind on already significant cost of living pressures.

21:01 Long-term, it would significantly undermine the easy capital we

21:04 have been blessed with over the last 80 years.

21:06 Our debt has always been a burden to carry,

21:09 and keeping it manageable relies on being

21:11 able to grow faster than the debt does,

21:13 while simultaneously doing everything we can to carry the weight responsibly.

21:17 Right now, that debt is just shy of $40 trillion,

21:20 and it grew by about $3 trillion over the past year.

21:23 The economy underneath it managed less than two.

21:26 The interest alone is costing around a trillion a year.

21:29 At the same time, we are doing a lot of things

21:32 that are shifting that weight around

21:33 while simultaneously shooting ourselves in both feet.

21:35 Now, one ray of hope in these numbers is that out of everything,

21:38 cars are getting cheaper.

21:40 New vehicle prices fell again in this report as manufacturers have

21:43 undermined their own market in some of the dumbest ways possible.

21:46 So, go and watch this video next to find out how.

21:48 And don't forget to like and subscribe to keep on learning how money works.