Food commodity prices are soaring. The Federal Reserve may not care since the core inflation number it watches takes food and energy prices out of the calculation. But commodity traders do. And so does your wallet, I’ll bet.
Ahead of tomorrow’s meeting of the Federal Reserve’s interest-rate-setting Open Market Committee, the Bureau of Labor Statistics today, March 18, reported a miniscule 0.1% increase in the core inflation rate in February. On an annual basis, core inflation is up just 1.6%. That’s well short of the Fed’s 2.5% target. The very low rate of inflation is one more reason to think that the Fed will hold its course at tomorrow’s meeting with another $10 billion reduction in what was once a program to buy $85 billion a month in Treasuries and mortgage-backed securities and a pledge to keep short-term rates at their current low 0%-0. 25% range deep into 2015.
But for those of us who live in the real world—as opposed to the Fed’s world where energy and food prices don’t count in calculating inflation—the inflation trend is a little ominous. Food prices climbed 0.5% in February, the fastest monthly increase since September 2011. Prices for meat, poultry, eggs, and fish climbed 1.2% in the month.
The price increases don’t stop with those food items. Coffee prices are up 70% thanks to unseasonably dry weather in Brazil. An epidemic of pig virus has sent pork prices up 40%. Wheat is up on the crisis in the Ukraine and on extreme cold in the United States. Dairy prices are up on rising demand from China.
And current weather may not be the end of the problem. Read more
It looks like another group of gold traders and investors has thrown in the towel today. Yesterday on news that the Federal Reserve would taper its $85 billion in monthly asset purchases to $75 billion gold fell below $1,200 an ounce to a five-month low.
Today gold (February 14 futures on the Comex) has dropped another 3.2% (as of 2:30 p.m. New York time) or $39.20 an ounce to $1195.30.
It sure looks like some traders, who had been holding onto their gold positions in the hope that the price of gold would climb on news either that the Fed had decided not to taper or that the taper would be very modest, are selling today. The logic to being long gold ahead of the Fed’s decision was that the market would see either a no-taper or small-taper decision as likely to produce inflation—which would lead to an advance in gold prices. With the price of gold dropping on what was indeed a very modest taper, this argument for holding gold is done, cooked, out of here.
Selling does look like the best decision in the short term since the downward trend in gold—with futures down 36% from the September 11 record of $1,923.70—is still in place. And it’s not clear where it stops. I’m hearing $1,000 an ounce frequently but I don’t know if that’s based on anything other than $1,000 being a nice round number. Certainly markets have a tendency to defend round numbers—such as $1,000 an ounce—but that doesn’t mean they always successfully defend them.
In the long term, however, the picture looks very different with the supply of gold falling. Read more
A lower than expected headline number on consumer inflation in November hasn’t been enough to send stocks higher ahead of tomorrow’s Taper/No Taper decision from the Federal Reserve’s Open Market Committee
Lower than expected inflation, the consensus has been, would be a reason that the Fed might not decide to begin a taper of its $85 billion a month in asset purchases at its December meeting. Withdrawing stimulus, even a little stimulus, from an economy showing such a low rate of inflation could increase fears that the economy might be headed into deflation.
Today, though, I think the uncertainty of tomorrow’s result has pulled some money to the sidelines without reference to the inflation data.
But the size of the drop—just 0.23% on the Standard & Poor’s 500 as of 3:30 p.m. New York time—says to me that the financial markets aren’t deeply worried about tomorrow’s result at the Fed.
Headline inflation was flat in November after dropping 0.1% in October. The consensus among economists surveyed by Briefing.com was looking to an increase of 0.1% in November. The biggest factors in the drop were energy prices, which dropped 1% in November and motor fuels, which fell 1.6%.
The core inflation number, which excludes volatile food and energy prices, climbed 0.2% in November. That ended a string of three consecutive months of 0.1% growth in core inflation. Core inflation is up 1.7% for the last 12 months.
After rallying in September and October in anticipation of rising inflation in 2014, TIPS (Treasury Inflation Protected Securities) have dropped like a stone in the last month. They’re now down 8.8% in 2013, the biggest drop, according to Bank of America Merrill Lynch, since they were introduced in 1997.
According to the TIPS market forget about inflation in 2014. It’s a slowdown in price increases—which isn’t the same thing as deflation by a long shot—that faces the financial markets and the economy next year.
The gap in yields between fixed-rate Treasuries—where the payout doesn’t change with inflation—and TIPS—where the bond pays out more as inflation rises—shows the market predicting that inflation, by official measures, will average 1.75% over the next five years. That’s a huge decline from the year’s high in March when the TIPS market was pricing in a 2.42% inflation rate. (Economists surveyed in Bloomberg are expecting consumer price inflation of 1.5% this year. That would be the lowest rate since 2009 and the second-lowest annual rate since 1963.)
This view on inflation is a huge turnaround from the earlier consensus that the massive expansion of the Federal Reserve balance sheet would result in an increase of inflation as the increase in the money supply fed into the economy. The Fed’s balance sheet has climbed to almost $4 trillion from $900 billion in 2008 as the U.S. central bank bought financial assets to lower interest rates and stimulate the economy. (Similar increases in balance sheets and money supply by the European Central Bank and the Bank of Japan would result in global inflation, the consensus held.)
By it now looks like a decline in wages and employment and the associated weakness in demand will trump central bank printing presses. At least for a whie.
Now the TIPS market doesn’t have to be right. Read more
Is it time to talk about the “D” word?
You know, deflation.
I know that inflation has been and continues to be the big worry. And that’s only logical since you’d figure that with the Federal Reserve, the European Central Bank, the Bank of Japan and other global central banks pouring money into the financial system that we will have to see inflation at some point. And I think that continues to be a real danger: At some point all that monetary stimulus will result in across-the-board asset price inflation (in contrast to the selective asset inflation we’re seeing now in areas such as residential real estate in China) and at some point all that central bank cash will start pushing up priced in general.
But we’re not at that “some point” yet. It looks like first we’ll go through a period where the trend is, surprisingly, towards deflation. Not across-the-board. I don’t think we’re looking at a global equivalent of the Japanese experience of the last 15 years where prices in general fall and then fall. But we are likely to see strong deflationary trends in huge hunks of the global economy and the trends will be strong enough so that stock prices—and investors—will notice.
Another surprise from the global financial crisis and the unprecedented experiments that global central banks are running an attempt to create a sustained recovery? You bet.
Here’s what this period of deflation will look like and why it has made this unexpected appearance. Read more