If inflation were a body of water, it would have looked like California’s drought-stricken Folsom Lake for most of the last decade. Thanks to years of downward-trending commodity and consumer prices, inflation all but evaporated from the financial landscape.
But the long-running “inflation drought” has ended.
The U.S. Labor Department announced last Thursday that the Consumer Price Index (CPI) climbed 5% over the last 12 months. That’s the largest bump since the 5.4% increase for the year-long period ending August 2008.
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The core-price index, which excludes categories with high volatility like food and energy, increased 3.8% in May from a year prior. That was the largest such increase since June 1992.
Ever since the Great Recession of 2008-2009, thanks largely to the Federal Reserve’s on-again/off-again quantitative easing (QE) program (i.e., money-printing, commodity and consumer prices have trended ever lower. The CPI inflation readings slumped from a high of 5.6% in July 2008 to a low of nearly 0% in May 2020.
That’s about the time our inflation story took an unexpected turn. Falling CPI readings reversed course and headed higher… and, as we saw with May’s numbers, they are climbing still.
So in today’s issue, let’s dig deeper into the inflation story of 2021…
The Inflation “Hat Trick”
Inflation’s “sudden” appearance should not be a complete shock. It is the result of three powerful forces:
- A massive, new QE campaign
- Off-the-charts government spending
- Major supply-chain constraints that are causing commodity prices to soar
Any one of these factors, by itself, might have been sufficient to nudge inflation into a higher gear. All three of them at once could kick inflation into a gear we haven’t seen since the Bee Gees’ “Stayin’ Alive” was topping the music charts.
Yet very few investors or high-profile financial figures seem too troubled by it. To them, James Grant recently observed, “inflation seems not so much a threat as a relic.”
In fact, far from being seen as a threat, most investors view inflation as an ally in the fight against deflation. Even Jerome Powell, the Fed chair, embraces this approximate philosophy. He believes deflation fighting is Job No. 1, and he has enlisted the forces of inflation to help wage that fight.
“Many find it counterintuitive that the Fed would want to push up inflation,” he said recently. “However, inflation that is persistently too low can pose serious risks to the economy.”
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In less than 15 months, the Fed’s QE program sopped up nearly $4 trillion of Treasurys and corporate bonds — or more than double the total the Fed acquired during the preceding 11 years.
Remember, QE is a form of money-printing… and money-printing is quite literally the thing we call “inflation.”
So, let’s score one point for inflation.
Meanwhile, Congress has been producing the largest government deficits since World War II, thanks to $3.5 trillion worth of economic rescue packages.
In the name of “saving the economy” from the ravages of the coronavirus pandemic, the government is spending trillions of dollars it doesn’t actually have.
During the last 12 months, the federal government has racked up an astonishingly large deficit of $3.6 trillion, which is nearly double the astonishingly large $1.9 trillion deficit of the preceding 12 months.
The $3.6 trillion figure is equal to 16% of GDP, which is the largest annual deficit since 1945 — the year we were busy winning a world war on two continents.
And the deficit numbers continue to move in the wrong direction. In April alone, the deficit reached $660 billion, as spending vaulted to nearly $1 trillion — up a hefty 161% year-over-year.
Traditionally, soaring government deficits coincide with rising inflation. So, let’s score a second point for inflation.
Skyrocketing Commodities
To complete the pro-inflation “hat trick,” commodity prices are on a tear. The CRB All Commodities Index has jumped nearly 60% since April of last year and reached a 10-year high.
As the chart below shows, more than half the commodities in the CRB are trading at their highest levels in at least five years.
High-profile “glam” commodities like copper have been grabbing most of the headlines… and for good reason. The copper price has doubled during the past year.
But the ongoing commodity rally is broad-based. The agricultural complex, for example, has delivered some dazzling results of its own.
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The price of corn has doubled, as has the price of soybeans. During the last 60 days alone, agricultural commodities, as represented by the Bloomberg Agricultural Sub-Index, have rocketed 17%.
Which brings us back to Folsom Lake: the formerly picturesque lake northeast of Sacramento that is becoming a dust bowl.
In the next issue of Smart Money, I’ll show you how the parched lake is part of the reason why we’re seeing inflationary prices.
Moreover, at least metaphorically, this dusty lakebed also points out how we can protect ourselves — and potentially even profit — from the ravages of inflation.
So, we’ll take a look at that, too.
I’ll see you then.
Meanwhile, I just released the latest Fry’s Investment Report. In the June Issue, I take a much deeper dive into the inflationary times we find ourselves in.
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To get that latest pick as a member of Fry’s Investment Report, click here.
Regards,
Eric Fry
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NOTE: On the date of publication, Eric Fry did not own either directly or indirectly any positions in the securities mentioned in this article
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