Inflation Is Here To Stay
Just Because Commodities Are Cheaper Doesn't Mean It is Gone
Today the Consumer Price Index came out at 9.1%. It was supposed to be 8.8%. Last month, it was up 8.6%. The S+P dropped 2.5% on the news.
If you take a 360 degree look at markets and the situation on the ground, commodity prices have dropped a bit in the last couple of weeks. The big one, crude oil, dropped. Here is crude oil over the last month. Would have been a nice short.
It is a gigantic mistake to look at commodity prices and conclude inflation has been tamed.
Just to reiterate what I have said before on this blog, the two biggest input to the costs of production are first the cost of labor, and second the cost of energy. Sure, oil was $120/bbl and is $95/bbl today, but it doesn’t mean it won’t go back up nor does it mean it will go to levels seen during the Trump years. There are plenty of other factors driving up both the cost of labor and oil besides the raw material.
At the same time commodity prices were going lower, the Federal Reserve was raising interest rates. That has caused the housing market to cool. By the way, higher interest rates also cause drops in commodity prices because it is more expensive to hold them and hold open positions on margin in them. Here is the Fed Funds Futures. Lower prices mean higher interest rates.
Understand this, the interest rate is simply the “cost of money” or the price you pay to use it. Raising interest rates doesn’t necessarily cure inflation. Inflation isn’t “tamed”. Not close.
Inflation is caused by the government creating and spending too much money.
Has the US government slowed down? Nope. Have the effects of the various upticks in spending due to Covid and the big Biden spend in March of 2021 worn off yet? No.
Yesterday the President’s press secretary informed the Industrial Media Complex that the CPI number was backward-looking and that the Putin Price Hike is still in the economy. She’s trying to make you look away. First off, all economic releases are backward-looking and always have been. You can go online and find lots of different forecasts. It’s why we have markets because markets show differences of opinion. If you think inflation is tamed, by all means, go in and buy the market with both hands. Secondly, Putin didn’t cause inflation in the US. It is flimsy thinking to look at the price of oil and decide if there is inflation or not. Too many other factors go into inflation but as I said, the primary driver of inflation is the federal government spending and creating too much money.
When the government slows down, inflation will get tamer. Until then, buckle up. CPI might go a bit lower but it’s still going to be a lot higher than an acceptable rate of 1-2%.
Interesting, I took a recent peek at the $GE_F contract. Eurodollar futures are down big, .20 ticks or more. That's a huge move. Bond futures on their highs. Yield curve inversion. This is where short term interest approaches the rate of long term interest....which is a recession and a function of the Joe Biden Economy. Math and economics suck for the Marxists
If instead of interest rate hikes, the fed chose instead an auction program to reduce the size of its balance sheet to reduce cash outstanding. Say goal to reduce M2 back to pre 2019 levels - around 4 trillion. Possible and time frame? Would this crush the primary dealers? Would the losses exceed the past 10 year of treasury transfers?