Is The End of Inflation Finally Here?

Big day tomorrow!

Our friends over at the Bureau of Labor Statistics are releasing June inflation numbers. The consensus is forecasting that prices rose 8.7%. Just last month headline inflation posted at 8.6% year-over-year which is a 40-plus year high. 

The number is not likely to be a surprise (unless it comes in at 10%!)

Inflation has been eating away at the wealth of Americans for the past 18 months. Originally brushed off as “transitory,” it is now public enemy No.1 on the Fed’s Top 10 Most Wanted list. 

It has to be brought back into line, according to Fed Chair Jerome “Jay” Powell.  Even at the risk of a recession. Their talk has gotten serious. Their actions have actually been in line (bumping rates 150 basis points since March). And their promises of more hikes to come are sounding almost believable.

But are they making any headway?

Prices Have Been Falling

You probably haven’t noticed them, but prices have been falling. Take a look at a few charts from the last 18 months:

September Crude Oil Futures

Source: Barchart.com

September Wheat Futures

Source: Barchart.com

September Copper Futures

Source: Barchart.com

September Lumber Futures

Source: Barchart.com

September Gasoline Futures

Source: Barchart.com

Surely the price weakness in all these commodities suggests some kind of good news? We have to be due for some kind of break in inflation hammering our wallets!

Not so fast. 

Certainly, any pause in the upward trend of these prices is a welcome sight. But the shift back lower by no means means we’re out of the woods.

Barometers of Economies

You probably noticed all these charts are of commodity futures contracts. One thing commodity prices are a famously great predictor of is inflation. 

The other thing they’re a great predictor of are recessions.

Markets are always forward looking. Which means they look to “price in” what demand will be in the future. Price weakness isn’t necessarily a good sign. 

Edward Yardeni, president and chief investment strategist at Yardeni Research, told Barron’s that commodity prices offer a good read on the sentiment about the global economy.  

“Right now they are definitely pointing towards weaker demand for commodities broadly, which could only be because global economic growth is slowing,”

This creates a real dilemma where Chairman Jay and the rest of the Fed is concerned. 

Their sole focus has been to get inflation back under control for reasons we’ve previously discussed. Their official guesses projections, as of their June FOMC meeting, puts inflation at 5.2% by the end of 2022. 

(Note: The Fed’s preferred measure of inflation is the Core PCE Index which are personal consumption expenditures minus food and energy prices.  After their March meeting they were forecasting 4.3% by the end of the year. The index clocked in at 6.3% last May as opposed to headline CPI’s 8.6% print.)

They see inflation down to 2.7% by the end of 2023 and 2.3% by 2024.

Despite the fact that inflation numbers appear headed in the wrong direction, their projections suggest things won’t get significantly better until the end of 2023 — a year and a half off.

And the last thing they want to do is keep aggressively hiking interest rates should the economy slide into a recession.

In your next letter, I’ll tell you where we most likely are on the arc toward recession…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily