(Mike Maharrey, Money Metals News Service) Here we go again.
The Bureau of Labor Statistics (BLS) released the October Consumer Price Index (CPI) data today. It was hotter than expected.
Persistent price inflation has once again raised expectations for a December rate hike. In fact, many analysts now think the Fed may hike 50 basis points.
The CPI data certainly paints a gloomy inflation picture, and it’s even worse.
Each month, the Bureau of Labor Statistics releases the Consumer Price Index (CPI) report. Policymakers, pundits, and economists use this data to gauge the current inflation situation.
But relying solely on CPI data to gauge inflation is a little like looking at the temperature and claiming you know the weather.
CPI tracks price inflation – more specifically, changes in the price of a basket of goods. But historically, inflation was defined as an increase in the supply of money and credit. Rising consumer prices are one impact of this monetary inflation. In other words, the CPI measures a symptom of monetary inflation.
The CPI captures past monetary inflation in the economy, but it can’t predict inflation’s trajectory. That means we need to look at other metrics to understand the complete inflation story.
With that in mind, I publish a more comprehensive inflation report each month using four metrics – CPI, changes in the M2 money supply, changes in the Federal Reserve balance sheet, and the Chicago Fed National Financial Conditions Index.
October CPI
Prices rose 0.4 percent last month. The forecast was a 0.3 percent increase.
The BLS did not release annual CPI data this month. The government didn’t publish a report last year due to the government shutdown, so there are no numbers to compare.
CPI was above the Fed’s mythical 2 percent target for 68 straight months.
Stripping out more volatile food and energy prices (something real people can’t do), core CPI increased by 0.3 percent. The forecast was for a 0.2 percent gain.
It was the third straight month with a 0.3 percent core CPI increase. That annualizes to 3.7% compounded.
Energy prices continued to push the overall CPI higher last month. The energy index rose 0.7 percent month-on-month, following a 5.2 percent monthly gain in September.
Gasoline prices rose another 1 percent in October, following a 9.3 percent price surge in September.
Meanwhile, shelter prices drifted up another 0.3 percent. Food prices surged 0.5 percent, driven by a 1 percent increase in the price of snacks, a 0.9 percent rise in beef costs, and a 0.5 percent rise in poultry, fish, and egg prices. Transportation services jumped 0.8 percent month on month, while new vehicle costs increased 0.2 percent.
M2 Money Supply
The money supply has been growing for months, and the pace is accelerating.
That is, by definition, inflation. However, we won’t see its impact on the general price level for months.
Between September 2025 and September 2026, the money supply surged from $22.15 trillion to $23.41 trillion.
In other words, the actual inflation rate is 5.7 percent.
The M2 money supply increased by $113 billion in September alone, a 0.49 percent m-o-m gain.
So far this year, the money supply has grown by an average of $136 billion per month. That is 89 percent higher than the average monthly increase in 2025.
This monetary inflation will eventually find its way into consumer prices. (It could also manifest in rising asset prices such as real estate and equities.)
The Federal Reserve Balance Sheet
One reason the money supply is increasing is due to central bank money printing.
While Warsh & Co. talk tough on inflation, the Fed is running quantitative easing (QE) operations to create artificial demand for Treasuries and hold yields lower than they otherwise would be. That means the central bank is buying U.S. Treasuries on the open market and holding them on its balance sheet. To run this operation, the Fed creates money out of thin air to pay for these bonds. That new money gets injected into the economy. Again, that is, by definition, inflation.
The Fed will never admit to running QE. It will tell you it is just a technical operation to keep the financial system’s plumbing clear. But no matter what you call it, the practical impact is the same. The Fed’s balance sheet expands, and new money flows into the economy.
The central bank’s balance sheet began ticking higher last December, and the upward trend continues. The balance sheet rose about $5 billion in October. It is up $212.4 billion since its December 1, 2025 low.
Keep in mind the Fed must run QE just to keep the balance sheet steady. Bonds mature and roll off the balance sheet monthly. The central bank must buy new securities to replace the old ones.
I can’t overstate the fact that the Fed is easing monetary policy through its balance sheet operations, even as it claims to be fighting inflation. Sure, the balance sheet increase is modest. But if you’re serious about an inflation fight, why isn’t the balance sheet shrinking?
The answer is the evolving bond bear market. With rising yields driving up the federal government’s interest costs, the Fed has no choice but to step in and support the Treasury market.
National Financial Conditions Index
While everybody imagines monetary policy is currently tight, it remains loose from a historical perspective.
The Chicago Fed’s own National Financial Conditions Index (NFCI) reveals this.
As of the week ending October 9, the NFCI stood at −0.487. The minus sign indicates financial conditions remain historically loose.
Surprisingly, the NFCI never went positive, even during the height of the Fed’s tightening cycle. Its highest level was -0.09 in October 2022.
Again, this reveals the Federal Reserve inflation fight wasn’t nearly as aggressive as advertised. It maintained a historically loose monetary policy through the entirety of this inflation cycle.
It also reveals that the economy is addicted to easy money. The fact that the central bank never drove financial conditions tight for fear of collapsing the debt-riddled bubble economy is telling. It certainly wasn’t because inflation was under control.
Conclusion
The CPI paints a concerning inflation picture, and based on these other data points, we shouldn’t expect inflationary pressure to ease anytime soon.
The Federal Reserve never did enough to slay the inflation dragon unleashed during the pandemic, and despite all the talk about a hawkish Fed, monetary policy remains historically loose.
Most analysts expect the Fed to hike rates again in December. As I mentioned earlier, some even think Warsh & Co. will get even more aggressive and hike by a half-percent. Gold sold off sharply, as investors anticipate rising interest rates.
However, don’t forget that a massive Debt Black Hole restrains the Fed. The central bankers may want to hike aggressively, but they know an economy supported by debt won’t do well in a higher-interest-rate environment. The Fed is in a Catch-22. It needs to raise rates. The inflation data makes that clear. But one could also argue for rate cuts given the debt.
This is why the Fed has tried to walk a tightrope by raising rates – but not too much.
In all likelihood, the Fed will hike by 25 basis points in December and continue with its hawkish stance.
However, another small rate hike won’t be enough to stop money supply growth nearing 6 percent. It won’t stop Fed money printing.
But it may be enough to pop the debt bubble.
If that happens, it will almost certainly drive the economy into a recession, and it could precipitate another financial crisis. If history is any indication, the Fed will go all in on rate cuts and QE when that happens. It always chooses to prop up the economy with easy money in a “crisis” – inflation be damned. A Warsh-led Fed could respond differently, but I’ll need to see it to believe it.
At this point, all roads seem to lead to inflation.
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
