Episode summary
Hot Inflation Shocks Markets: The Worst Is Still To Come | Steve Hanke
The David Lin Report
· · 52 min · Hosts: David Lin · Guests: Steve Hanke
Summary
Steve Hanke argued that the hotter-than-expected September CPI report was not a one-off, but part of a broader inflation problem driven by money-supply growth above what he calls the 2% target-consistent rate. He said headline CPI at 3.7% and core CPI at 2.6% both remain too high, and he blamed rising fuel costs, especially diesel, for much of the pressure on households and businesses.
He pushed back on the idea that energy is isolated from the rest of inflation, saying the effect works through logistics, trucking, agriculture, and storage constraints. Hanke said physical oil is much more expensive than quoted futures prices imply, inventories are low, and backwardation reflects a shortage of storage rather than an imminent price drop. He also argued that China’s refining choices and geopolitical bottlenecks are helping keep diesel tight.
Beyond inflation, Hanke said the AI investment boom is helping sustain money-supply growth and keeping rates elevated. He warned that rising inflation is also eroding real wages, which he sees as another reason affordability is worsening and recession risk cannot be dismissed if monetary growth does not slow.
Key takeaways
- Steve Hanke said the inflation genie is "out of the bottle" because broad money growth is still above the level he thinks is consistent with 2% inflation.
- Hanke said diesel, not just gasoline, is the key pressure point because truckers, farmers, and refiners are all paying sharply higher fuel costs.
- He argued that oil backwardation signals low storage and tight inventories, not a clean signal that prices will soon fall.
- Hanke said the AI capex boom is boosting credit demand and helping keep money supply growth elevated.
- He warned that inflation-adjusted wages have been falling for about six or seven months, worsening affordability even if headline spending stays resilient.
How the episode opens
The inflation genia is out of the bottle. There is a shortage of oil in storage. The physical oil prices are up about 3540% greater than than the prices we're quoting right now.
We should be very concerned about it. You can borrow from the future at a low price and sell it in the spot market at a high price. And the reason it's doing that is inventories are abnormally low.
It's Wednesday, October 14th, and both headline and core CPI data came out this morning, exceeding forecasts by 0.1% each. Headline CPI was 3.7% yearonear in September, while core CPI was 2.6%. Gasoline went up 9.1% in September alone and accounted for more than half of the entire monthly CPI increase.
Interestingly, the BLS reported that food prices actually didn't go up in September. And in fact, some food products actually went down. And what's interesting to me as well, the shelter component went up in September while many major real estate markets have been cooling off.
So, what is going on? We're going to get Steve Hanky, professor of applied economics at Johns Hopkins University, uh, to help us make sense of it all. How worried should we be about inflation and what is the Fed going to do next?
Where are interest rates headed? We'll find out with Professor Hanky. Welcome back, Professor Hanky.
Good to see you again.
Yeah, good to see you, David. Great to be with you. A lot of action today. — Lot of action today. Uh we're speaking on uh Wednesday and uh yeah, stocks are down huge. Uh NASDAQ's down 2%. A lot of that was the chip selloff. Uh S&Ps down 1%. Treasury yields interestingly are also down. We can talk about that. And gold is down. Uh before we talk about where markets and the bond market is headed, let's talk about inflation.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- hot inflation shocks
- diesel crisis
- oil prices remaining high
- ai boom and interest rates
- fed recession risks
Watch the episode
Watch “Hot Inflation Shocks Markets: The Worst Is Still To Come | Steve Hanke” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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