A lot of eyes were on Janet Yellen’s testimony in front of the Senate Banking committee last week, as investors wanted to hear more clues about a potential change in the economic and monetary policy of the Federal Reserve. People seemed to be particularly interested in finding out more about the expected rate hike pace and the reduction of the size of the Fed’s balance sheet.
Alas, no new statements were made on these topics (Yellen rarely provides ‘scoops’ in official hearings and testimonies), but she did confirm the inflation expectations remained on track thanks to the ‘strong’ labor market and the rising prices of imported goods (undoubtedly helped by the weakening US Dollar versus the Euro, as you can see on the next image).
Source: stockcharts.com
Surprisingly, the mainstream media jumped all over this quote to point out why the gold price was going down that day. Morningstar (copied from the Dow Jones newswires) went as far as using as title: ‘Gold Falls After Yellen Says Inflation May Rise‘ . Most news outlets tend to forget a lot of people actually buy gold as a hedge against that very same inflation as it’s one of the best ways to maintain a certain purchasing power (it’s a hedge against inflation and economic and geopolitical shocks).
Literally the next day, an updated Consumer Price Index and so-called real earnings report was released by the Bureau of Labor Statistics. Yellen might have to do her homework again, as the CPI data points out the situation remained completely unchanged in June. Not only does this derail Yellen’s previous statement, connecting the rate hikes to the inflation rate, it also means there’s a bigger problem.
While everybody was focusing on the CPI data, we compared those with the Real Earnings data. This taught us two different things which are completely contradicting each other. On the short term basis (Month on Month), the average hourly earnings for all employees increased by 0.2%. Is that surprising? Yes, considering the higher (hourly) income did not result in a higher inflation rate.
