Hot Inflation Shocks Markets: The Worst Is Still To Come | Steve Hanke

Steve H. Hanke · Johns Hopkins University

Gasoline price controls would bring back queues; waiting in line rations fuel at a higher cost than prices.

The 1970s sorry-no-gas signs were caused by price controls. Under controls, waiting time rations gasoline instead of price. The waiting time can be more costly than a higher price: if your hourly opportunity cost is around $35 or more, an hour in line costs you more than the extra price at the pump. Hanke argues that people who want price controls show economic illiteracy.

“If you do those price controls, you will have to wait in line because the waiting time will ration the gas.”at 20:05

Steve H. Hanke · Johns Hopkins University

Oil stays high: physical crude trades 35-40% above futures as inventories are abnormally low.

Futures quotes are paper prices, not prices for physical oil. Physical oil is about 35-40% above the quoted benchmark; adding roughly 40% to Brent approximates the landed physical price at most destinations. Backwardation signals a storage shortage rather than falling future prices: buyers pay a premium for prompt barrels, and traders borrow from the future to pull oil into inventory because inventories are abnormally low. Hormuz flows have recovered only partly, and logistics add cost and delay: oil is transshipped from smaller to larger tankers, tanker lease rates have gone through the roof, and refiners must decide where scarce barrels go. These frictions keep prices elevated even as volumes recover.

“Those are paper prices, they're not prices for physical oil. The physical oil prices are up about [35 to] 40% greater than the prices we're quoting right now.”at 24:39

Steve H. Hanke · Johns Hopkins University

China is cutting diesel exports despite spare refining capacity, defying Trump's request for more supply.

US refiners run at about 97% utilization, while China's refiners run at only about 75%, so China has excess refining capacity. After Trump met Xi and asked for more diesel production and sales, China cut its exports of diesel and refined products. Hanke reads this as Xi telling Trump off. Chinese refiners' margins are very fat, but Hanke notes that in China refiners do what Beijing tells them.

“and what did Xi do? He quietly went home and cut the exports of diesel and refined products.”at 27:29

Steve H. Hanke · Johns Hopkins University

Trump's diesel measures are theatrics; EU releases were already scheduled and Russian promises are negligible.

Trump threatened Europe with a 50% tariff unless it released diesel from storage, but the European releases had already been scheduled since March, so the announced releases add nothing new. Trump also temporarily lifted some Russia sanctions, which Hanke sees as a good thing because he considers sanctions counterproductive. Putin's promised diesel to the US is peanuts, and Russia's capacity to deliver is doubtful because about 45% of its refining has been knocked out. Hanke concludes that the policy steps amount to theatrics that will not change the supply outlook.

“Everything Trump is saying is it's basically theatrics. It's not going to amount to anything.”at 31:59

Steve H. Hanke · Johns Hopkins University

Diesel tightness persists; IEA's view that supply stays tight into late 2027 is right.

Diesel is the epicenter of the energy concern, up about 70% since the start of the war. Agriculture is in harvest, with combines running full speed on diesel, and trucking demand is heavy, with fills topping $1,000 per rig. Around 45% of Russian refining capacity has been knocked out by Ukrainian strikes, which limits Russian diesel exports. Hanke agrees with the IEA that supply stays tight, with the squeeze lasting into late 2027, and that prices will stay high for quite some time.

“the International Energy Agency has the numbers, and they have the right diagnosis that these prices will stay high for quite some time.”at 32:07

Steve H. Hanke · Johns Hopkins University

US inflation stays above target because broad money (Divisia M4) grows about 7.5%, above the 6% golden rate.

Hanke's golden growth rate, the money supply growth consistent with a 2% inflation target, is about 6% a year, possibly a bit less. The Divisia M4 measure, the broadest and best money measure per Hanke, published by the Center for Financial Stability, is running about 7.5%. Money growth above the golden rate means inflation must run above target. Every inflation measure he checks, core included, runs above target. Inflation is always and everywhere a monetary phenomenon, so the CPI print is driven by overall money growth rather than by the noise across the more than 300 CPI items.

“it's running about seven and a half percent, so it's money supply is growing greater than the golden growth rate, a rate consistent with hitting the target”at 5:43

Steve H. Hanke · Johns Hopkins University

Energy costs are pushing up CPI and household bills, so the energy shock matters for inflation.

Hanke rejects the claim that the energy shock is not moving inflation. The biggest year-over-year CPI gains are energy items: fuel oil up 74%, gasoline up 34%, utility gas up 5% and electricity up 4.4%, all above headline CPI of 3.7%. Heating oil bills in New England are biting as households fill tanks before winter. Hanke says this is why people are complaining, even though some categories such as used cars, down 1.5%, are falling.

“That's totally incorrect. We should be very concerned about it.”at 8:45

Steve H. Hanke · Johns Hopkins University

The inflation genie is out of the bottle and won't end until policy tightens and money growth slows.

Hanke says the higher-than-forecast CPI print is not the end of inflation. He sees the problem as monetary: money supply growth is still too strong. He argues that inflation will persist until the Fed tightens monetary policy and slows the growth rate of the money supply. He ties this to the affordability squeeze, with real wages falling for months.

“I think the inflation genie is out of the bottle. It's not the end of it, and it won't be the end until they tighten the monetary policy and slow the growth rate in the money supply.”at 54:12

Steve H. Hanke · Johns Hopkins University

Inflation and cost of living are Trump's Achilles heel before the midterms, with poor polling on both.

The election is the first Tuesday of next month, and voters are focused on inflation, affordability and the cost of living. Trump is getting very bad polling numbers on these issues. Hanke cites a survey in which about 70% of people say they are not satisfied with affordability and cost of living, which he treats as the number that counts over official data.

“People are talking about the Achilles heel of Trump, and that's inflation, and the cost affordability, and the cost of living, all those things.”at 15:29

Steve H. Hanke · Johns Hopkins University

About 45% of Russian refining capacity has been knocked out, limiting Russia's ability to send diesel to the US.

Hanke argues that Russia's promised diesel to the US is peanuts, and questions whether Russia can deliver at all because about 45% of its refining capacity has been knocked out by Ukrainian strikes. He says the Ukrainians could not hit these targets without US-provided targeting coordinates, so US involvement underlies the refinery outages that constrain global diesel supply.

“about 45% of their refining capacity has been knocked out by the Ukrainians.”at 31:17

Steve H. Hanke · Johns Hopkins University

Airline demand is relatively insensitive to fare increases; travel holds up despite a 22% fare rise.

Airfares rose 22% year over year in the CPI report, yet TSA throughput for 2026 has stayed roughly flat and is up relative to the start of the year. Hanke says demand for air travel is relatively insensitive to price moves of this size. He attributes this to the wealth effect, since many air travelers hold stock portfolios, and that keeps consumption robust.

“The demand for airline travel is what you're showing is relatively insensitive to price movements of the magnitude that they've been going up.”at 33:16

Steve H. Hanke · Johns Hopkins University

Stock-market wealth effect keeps US consumption robust despite higher energy prices.

Many travelers hold stock portfolios, so the wealth effect applies. Hanke puts the marginal propensity to consume out of stock wealth at about 3 cents per dollar: a $100 gain in stock portfolios induces about $3 of extra spending. This keeps US consumption pretty hot despite high fuel and fare prices, and it explains why travel demand has held up.

“if the stocks go up by $100 ... the wealth effect, that increase in wealth, will induce consumption increases of about $3... So that keeps consumption pretty hot in The US economy.”at 33:45

Steve H. Hanke · Johns Hopkins University

Venezuela must dollarize; only replacing the bolívar with the dollar ends its roughly 250% inflation.

Venezuela has the world's highest inflation, about 250% a year, which Hanke measures daily. Iran is second at about 140%, up from about 90% before the war. Hanke has helped dollarize Montenegro in 1999, Ecuador in 2000 and Zimbabwe from 2008 to 2014, and says dollarization crushes inflation, stimulates growth and exports, and introduces stability. The economy has already informally dollarized, since groceries are priced in dollars and big purchases are not made in bolívares. The process: freeze central bank money issuance for 30 days, let the currency float, set the conversion rate from the free-float evidence, then exchange old notes for dollars.

“the only way to solve this problem and introduce stability into the economy is to replace the [bolívar] with the US dollar to dollarize the country.”at 35:07

Steve H. Hanke · Johns Hopkins University

Rates stay high until money supply growth slows, and that slowdown is not happening yet.

Hanke argues that rates will remain elevated until the money supply stops growing as fast. He says money supply growth is not slowing right now, so he sees no near-term relief in rates. He links the persistent money growth to AI-related borrowing, which keeps credit demand strong and lets banks keep creating deposits through lending. Mortgage rates near 7% and a 10-year yield near 5.2% are the backdrop for the question.

“Well, they'll stay high until the money supply starts slowing down. Which is not happening right now.”at 44:49

Steve H. Hanke · Johns Hopkins University

AI data-center borrowing is inflating the money supply because AI buyers ignore rates and keep borrowing.

Hanke identifies AI investors and data-center builders as a main driver of money supply growth. He says they are insensitive to interest-rate changes and keep demanding credit. When banks have the capacity to lend, each loan is credited to the borrower's checking account, which adds to the money supply. He calls the AI investment boom unprecedented, with nothing comparable since World War II. As long as the demand and bank capacity last, the hyperscalers keep pushing money growth up.

“One factor that's fueling the money supply growth is the demand by the investors in AI investments, data centers and things like that. So they're very insensitive to interest rate changes. Just keep demanding credit.”at 45:03

Steve H. Hanke · Johns Hopkins University

Rising money supply means no recession anytime soon; recessions follow a fall in money growth.

Responding to David Lin's point on velocity of money, Hanke says that the overall money supply is rising, and that suggests no recession anytime soon. He says recessions come when money supply growth falls and becomes anemic, and booms come when it is excessive. Nominal GDP, which is real growth plus inflation, is a function of money supply changes. It responds about 12 to 24 months after a significant change in money growth, so the rising supply points away from a near-term downturn.

“The overall supply is going up, and that suggests we are not going to have a recession anytime soon.”at 49:08

Steve H. Hanke · Johns Hopkins University

Real wages have been falling for six or seven months as inflation outpaces wage growth.

Hanke says inflation is rising faster than wages, so inflation-adjusted wages have been declining for about six or seven months. He links this to widespread anxiety about the economy and affordability. People are hit by diesel and gasoline prices, and their inflation-adjusted wages leave them with less purchasing power. He presents this as a second concern alongside the inflation outlook.

“Inflation is going up faster than wages are going up, which means wages adjusted for inflation are going down. They've been going down for about six or seven months.”at 54:20