We are two days away from the next electrifying CPI report (well, some of us consider it electrifying). The last few prints have been very low, causing great consternation among investors, economists, and other analysts who like to try and “play the carom” by picking turning points in the data.
As I have written before, there is nothing yet to suggest that inflation has abruptly turned and started to dive, and most of the shortfalls over the last few months have been caused by one-offs. (You can review my May, June, and July CPI summaries for the details, and also look at one of those one-offs in depth here.) Indeed, it would be odd if inflation suddenly turned tail and ran, since global money growth remains adequate to support the current level of inflation (see chart, source Enduring Investments).
This chart only shows the US and Europe, but if you add the UK and Japan and Switzerland and whatever else you like, the picture doesn’t change appreciably. In addition to the steady money growth (which, it should be remembered, no central bank is trying to restrain since most of them don’t believe it matters), housing prices continue to rise faster than inflation (see chart, source Enduring Investments) – which suggests that the cost of shelter is not about to suddenly go into retreat.
Finally, although it’s a minor effect, the dollar has recently weakened meaningfully. It isn’t a big deal but it changes the sign of that minor effect. Yes, there are pockets where I expect to see some coming or continuing weakness in pricing, such as in autos, but overall it would surprise me to see this three-month trend actually represent the top tick. Not to mention that such a thing would imply the casual inflation pundits were actually right, and not only right but timely. What are the odds?
Meanwhile, there are some interesting undercurrents that suggest I am not alone in thinking that inflation isn’t dead (again, or still, depending on your point of view). Against form, inflation swaps in the US have been rising anew; even more surprising, European inflation swaps are reaching towards new highs (see chart, sourced from our daily chart package) even though the Euro has been strong.
The market isn’t always…or even often…right. But there are flows into inflation product right now that, while hardly tsunamic, are causing moves unlike any we’ve seen recently. Also note that commodities are showing strength – the Bloomberg Commodity Index is up 6.5% since late June, and that isn’t all energy. The chart below (source: Bloomberg) shows the Bloomberg Commodity Index ex-energy.
With CPI on Friday, all I am saying now is that this is worth keeping in mind. Among all of the other negatives for stock and bond markets recently, a renewed rise in inflation would be an unwelcome addition.Subscribe to NFTRH Premium for an in-depth weekly market report, interim updates and NFTRH+ chart and trade ideas; or the free eLetter for an introduction to our work. You can also keep up to date with plenty of actionable public content at NFTRH.com. Or follow via Twitter @BiiwiiNFTRH, StockTwits or RSS. Also check out the quality market writers at Biiwii.com.