Fake Inflation Report Circulates, Sending Stocks Spiraling

Key Takeaways

• A fake inflation reported surface online the day before the official release, stating that CPI had increase by 10.20%
• The reality wasn’t quite as bad, with the official figures the next day showing a year on year inflation rise of 9.10%
• The Fed are expected to increase rates dramatically at their next meeting on July 26-27, with some analysts predicting an increase of as much as 1.00 percentage points

Well, this is unusual. We’ve been used to dealing with fake news for a while, and now it seems we’re having to deal with fake statistics as well. Inflation has been a hot topic for some time, and this month’s figures have just been released.

Investors have been left questioning who to believe, with the official release of the data from the U.S. Bureau of Labor Statistics being front-run by a fake inflation report. The report was ‘leaked’ on Twitter and quickly went viral due to its early release and its eye watering inflation figure.

The fake report stated that inflation was running into double digits at 10.20%, and the release even drove a late sell off in the markets.

Fake CPI report is released ahead of official announcement

It was on Tuesday that the fake report started to do the rounds online. It really says something of the environment we’re in when a news item that’s usually as dull as the latest inflation figures can inspire a hoax.

We’ve all heard of fake Gucci handbags, but doctoring a document to look just like a press release from the U.S. Bureau of Labor Statistics isn’t something we’re used to seeing.

And it spread like wildfire. The figure announced in the fake document was that inflation had increased by 10.20% year on year. This is high, but within the realms of possibility given some of the numbers we’ve been seeing lately.

Bloomberg reported that the release actually drove a sell off in markets late in the day, despite some fairly obvious signs that the document was counterfeit. Apart from the fact that the details were released a day too early, there were also a number of errors in the release, including a chart that showed figures that didn’t match with the document text.

The fake release was enough to convince a lot of people. So much so, that the real U.S. Bureau of Labor Statistics had to release a statement on Tuesday night stating that they were aware of a fake and confirming that the real figures would be released on Wednesday morning.

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What the real inflation report said

When the real figures were released, they were still quite bad. Prices have risen by 9.1% over the past 12 months, which is a further increase over the already sky high figure of 8.60% from last month.

This takes inflation to the highest level it’s been in 41 years, and it doesn’t show any signs of slowing down. Not only was this figure high in historical terms, it was also higher than many analyst estimates.

Bloomberg consensus estimates had inflation hitting 8.8% with JPMorgan expecting a figure of 8.7% and Goldman Sachs were predicting 8.88%.

The official release stated that the causes for inflation were wide ranging, but that the largest contributions to the increase had been from shelter, gas and food. Almost every component of the inflation index was up, with the only two that were down being airline fares and lodging away from home.

Some of the standout increases from 12 months ago include gasoline which is up 59.9%, food at home which has risen by 12.2%, household gas which has jumped 38.4% and even the cost of new vehicles which is up 11.4%.

The 12.2% increase in food cost is also notable as the largest 12 month increase since April of 1979, with butter and margarine increasing by 26.3% and cereal and bakery goods going up 13.8% year on year.

All in all, the data is backing up what most of us are feeling. Life is getting expensive.

What causes inflation?

Prices can rise for a few different reasons, but they mainly fall into one of two categories. The first is when there is a short supply of something, and this has been one of the major drivers of inflation off the back of the pandemic.

Take cars as an example. With lockdowns all around the world taking effect, factories that make cars and the companies that supply all their parts stopped work. With many thousands of orders already in the system, and new orders continuing to come up, this built up a bottleneck in the supply chain.

Particularly once lockdowns began to ease, this has created a situation where there are more buyers looking for a new car than there are new cars being produced. As a result, dealers are able to stop giving discounts and even raise prices, because they have more customers than they have cars.

This situation is one of the reasons why central bankers had been originally predicting that high inflation would be transitory. The idea being that once the supply chain worked through the backlog and got back to normal, supply would pick up and prices would come back down.

The other side of the inflation equation is demand. Even in normal times, demand for goods and services moves up and down based on the general state of the economy and the amount of money people have to spend.

When the economy is booming, consumers are getting pay rises and bonuses and just generally have more money. This means that businesses have more customers vying for their products, which also allows them to put up their prices without negatively impacting their number of sales and overall profits.

The Fed’s reaction to sky high inflation

The Fed can’t really do anything about the supply side of this situation. They can’t magically make factories in China produce more microchips or farms in Texas grow more corn. But they can impact demand.

The way they do this is by increasing the base interest rate. This is the rate that impacts how much a retail bank’s internal lending costs them, and in turn how much the bank charges you in interest on your debts. This hits consumers mainly in relation to expenses such as their mortgage, credit card and personal loan repayments.

With more money going towards debt repayments, consumers have less money to spend. That shiny new car looks less affordable if your repayments on your mortgage and other debt have increased by $250 per month.

This decreases the demand on goods and services, which slows the bidding up of prices and forces companies to keep their margins lower to keep sales ticking over.

This is why the Fed has been making such large increases to interest rates, because the rate of inflation is just so high. We saw a rate increase of 0.75 percentage points at the last meeting in June, taking the rate to 1.75%. This was the highest single increase since 1994, and there’s an expectation that there are many more to come.

The Fed themselves have predicted a base rate of 3.40% by the end of this year, rising even further to 3.80% by the end of 2023.

Off the back of this most recent inflation release, the futures market is predicting another big interest rate hike at the next Federal Open Market Committee (FOMC) meeting on July 26-27. Japanese investment bank Nomura has been the latest to predict a massive 100 basis point increase. This would take the base rate to 2.75%, which would see borrowing costs increase dramatically.

What can investors do about high inflation?

Like anything in investment markets, you can protect yourself against bad news if you know how to play it. Inflation has been a hot topic for a while now, and we decided to create something to help investors.

In order to take advantage of the situation and aim to provide some protection for investors, we created the Inflation Kit. This investment kit isn’t designed to make sky high capital gains, but it’s positioned to invest in assets that are typically a very effective hedge against rising inflation.

If you’ve got a portfolio that’s heavily weighted towards stocks, this kit can be a good way to lower your portfolio’s risk level.

To make this work, we invest in a range of assets that include Treasury Inflation Protected Securities (TIPS), precious metals such as gold and silver and other commodities like oil and agricultural products. These are held through a range of ETFs, and our AI automatically rebalances the portfolio weekly based on multiple datasets.

This can provide some peace of mind that your portfolio has an effective hedge, should prices continue to rise at their current pace.

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