Fed: Singing The Inflation Blues

With inflation surging and Powell praying for a “transitory” miracle, the troubles confronting the Fed are accelerating, not decelerating.

“I got the blues, Got those inflation blues”

— B.B. King

To explain, I wrote on Sep. 24:

I’ve warned on several occasions that the only way for the Fed to control inflation is to increase the value of the U.S. dollar and decrease the value of commodities. However, with commodities’ fervor accelerating on Sep. 23 – a day when the USD Index declined – the price action should concern Chairman Jerome Powell. As a result, FOMC participants’ 2022 inflation forecast is likely wishful thinking and they may find that a faster liquidity drain (which is bullish for the U.S. dollar) is their only option to control the pricing pressures.

To that point, with energy prices increasingly unhinged and WTI on pace for its seventh-straight week of weekly gains, the S&P Goldman Sachs Commodity Index (S&P GSCI) has been on fire recently. For context, the S&P GSCI contains 24 commodities from all sectors: six energy products, five industrial metals, eight agricultural products, three livestock products and two precious metals. However, energy accounts for roughly 54% of the index’s movement.

Please see below:

Chart, line chartDescription automatically generated

To explain, the green line above tracks the S&P GSCI’s current rally off of the bottom, while the red line above tracks the S&P GSCI’s rally off of the bottom in 2009-2010 (following the global financial crisis). If you analyze the middle of the chart, you can see that the S&P GSCI has completely run away from the 2009-2010 analogue. For context, at this point in 2009-2010, the S&P GSCI had rallied by 77% off of the bottom. However, as of the Oct. 5 close, the S&P GSCI has now rallied by 154% off of the April 2020 bottom.

Furthermore, with higher energy and materials prices exacerbating the cost-push inflationary spiral, signs of stress remain abundant. For example, IHS Markit released its U.S. Manufacturing PMI on Oct. 1. And while the headline index declined from 61.1 in August to 60.7 in September, Chris Williamson, Chief Business Economist at IHS Markit, said that “prices charged for those goods leaving the factory gate also surged higher again in September, rising at a rate exceeding anything seen in nearly 15 years of survey history.”

Please see below:

TextDescription automatically generatedSource: IHS Markit

Singing a similar tune, the Institute for Supply Management (ISI) released its Services PMI on Oct. 5. For context, the U.S. service sector has suffered the brunt of the Delta variant’s wrath. And though pricing pressures aren’t as feverish as they are in the U.S. manufacturing …

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