About that lack of Inflation….

It is Fed Speak season. That period between FOMC meetings when Fed Governors talk to the media about their views on the economy, labor markets, inflation and the path of interest rates. The current theme seems to be that interest rates should continue to move higher because they are low, but that the Governors would still like to see inflation pick up. So the path of rate hikes is at odds. They have been talking about a lack of inflation for quite some time, at least 2 years, maybe more. But there are signs of inflation building.

The chart below shows the CRB Index, a measure of commodity inflation. It does not capture the full realm of that the CPI or PCE Price Deflator does, but gives a good proxy for things that actually trade in markets. Things like cattle, crude oil, wheat and milk. And it is making 2 year highs.

A look at the chart shows the CRB Index has been steadily rising since the middle of 2017. This was after a pullback in the first half of the year that found support at a higher low. It has a long way to go to get back to the levels 2011 to 2014 and then the peak during the financial crisis, but it is increasing. Momentum also shows support for continued upside in prices. The RSI is strong and bullish. Expect the rhetoric from the Fed Governors to start to shift more towards rising rates if this continues and away from questioning where inflation may have gone.

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