Did the Federal Reserve misjudge inflation once again?

The U.S. October CPI growth rate reached a three-month high. Was the Federal Reserve's interest rate cut decision wrong?

On November 14, Peter Schiff, founder of Euro Pacific Funds and economic advisor for the 2008 presidential campaign, criticized the Federal Reserve for its misjudgment and inappropriate policy choices in addressing inflation issues.

Schiff pointed out that although the government and the Federal Reserve claim that inflation has been brought under control, in reality, the significant drop in used car prices has caused the average inflation rate to fall, masking the true inflation situation—many essential goods continue to see substantial price increases, such as health insurance rising by 6.8% and housing costs increasing by 5.2%. Inflation in the U.S. has not been effectively curbed.

Therefore, Schiff believes it is absurd for the Federal Reserve to assert that inflation has been tamed, just as they claimed in 2021 that inflation was 'transitory.'

On November 13, the U.S. Bureau of Labor Statistics announced that the U.S. October nominal CPI year-on-year growth rate was 2.6%, which met expectations but marked a three-month high. Currently, Wall Street believes that the Federal Reserve will cut interest rates by 25 basis points in December.

Inflation remains severe, and the significant drop in used car prices masks this fact

At the beginning of the pandemic, due to supply chain disruptions and other reasons, many large automakers were unable to produce an excess of new cars, leading to a surge in demand for used cars and skyrocketing prices.

After the pandemic, used car prices have fallen back, and government inflation reports show that used car prices have decreased by 10% to 12% year-on-year this year.

Schiff pointed out, this means that the significant drop in used car prices has dragged down the average level of inflation—prices for housing, healthcare, and other essentials have risen by over 5%, but due to used car prices dropping over 10%, the overall inflation rate is declining.

However, this situation is temporary, and once used car prices stabilize at 'normal' levels, overall inflation will rise again.

Schiff stated, "It now appears that this situation has already occurred." This summer, used car prices fell by 10.9% year-on-year in July, 10.4% in August, 5.1% in September, and only 3.4% in October.

Schiff believes that the "used car deflation" effect has come to an end, and it is not surprising that inflation rose from 2.3% in September to 2.6% in October.

More importantly, the price increases of many very essential daily goods far exceed 2.6%—health insurance rose by 6.8%, childcare costs rose by 6%, housing costs rose by 5.2%, and airfare rose by 4.1%...

Peter Schiff: Federal Reserve's Decision-Making Errors

Schiff believes that the Federal Reserve's decision to cut interest rates is very absurd—on November 7th local time, the Federal Reserve made the second interest rate cut of this cycle while inflation is rising. Schiff wrote:

"Just as they pretended inflation was 'transitory' in 2021, they now confidently assert that the inflation monster has been tamed."

Schiff also stated that Powell failed to take timely action when the U.S. needed to raise interest rates in 2021, only starting to raise rates in mid-2022, and that Powell also failed to foresee any negative consequences of the rate hikes, such as the collapse of the U.S. banking system