How to Profit From Latest Inflation Numbers

Hey There Income Hunters,

CPI showed another “higher for longer” reading of +5.4% year-over-year yesterday.

This number should push the Fed closer to announcing a timeframe on tapering its quantitative easing (QE) portfolio of $120 billion per a month in the Treasury and mortgage securities it keeps buying.

But wait — Chicago Fed chief Charles Evans said overnight that he would like to see a few more jobs reports before making a decision on tapering ..

You better sit down, or you’ll get dizzy from the constant flip flopping between Fed members.

 

Here is the bottom line: Inflation is sticking and is growing at the highest rate since the 2008 financial crisis …

 

And while during the financial crisis of 2008 inflation did end up being transitory, today’s economic and monetary conditions are a very different story …

Inflation Base Effects Are Behind Us, But Prices Continue Rising 

The current period of Fed policy is like no other.

Core consumer price index (CPI) is more than double the Fed’s mandate and we are looking at another $4 trillion-plus in government spending, assuming both infrastructure spending bills pass.

The graph below shows the Fed’s inflation target (2%) and its two chosen inflation gauges:

Of course, its preferred measure is the Personal Consumption Expenditures (PCE). Why may you ask? Because it historically comes in lower than core CPI. The Fed does whatever it takes to enable it to print more money …

Rising Prices

Let’s take a look at the prices that may have peaked in the past couple of months versus the ones that are rising. This illustrates that, overall, prices will stay elevated …

Prices That Have Peaked

      • Fed Regional Survey of Prices Paid +74.5
      • The National Federation of Independent Business (NFIB) Small Business Prices +46 after all-time-high in June
      • Institute of Supply management (ISM) Goods Prices Paid +85.7

Now, all three are either at or near all-time highs, and they have come off since June. They will, however, remain high for an extended period.

Prices on the Rise

      • Institute of Supply Management (ISM) Services Prices Paid +82.3
      • Consumer Inflation Expectations – consumer expectations 3-years forward are 3.71% … (Definitely not transitory!)
      •  Rent Price Expectations – consumers expect rents 1-year ahead to rise 9.75%, which is an all-time high.
      • Cass Corp. Freight Costs up 3.05%

Wages are Playing Catch Up 

Pay hikes for workers have been touted by the administration as a sign of workers’ new bargaining power.

But compensation overall has risen just 2.8%. When compared to the rising costs of essential goods and services households are still falling behind.

This means wages will continue to chase prices higher and wages, once raised, stay elevated for an extended period of time.

Energize Your Trading with Oil

Oil is the best inflation hedge in this environment, and after the recent correction it is time to get long.

Notice how closely oil tracks the 10-year breakeven inflation rate, which is  the yield on Treasury inflation protected securities — minus the yield on the 10-year note.

This pair gave you a warning on oil getting a bit too frothy in July. Now, however, after the move down from $77 to $65, it is looking undervalued … especially as expectations rise on the realization that inflation is not transitory.

I don’t want to chase the market higher, but if we get the chance to buy the United States Oil Fund (Ticker: USO) with oil down at $67 or $68, I will purchase a USO 48/50 call spread to Sept. 17 around $.75.

 

Bring It Home 

Wages and rent prices are center stage now. These inputs to inflation are sticky and have a big impact on Fed policy.

They are just beginning to run hot and the key signpost to watch now is whether wages can keep up with prices. 

If not, the net income for households suffers and growth will slow. If so, then households will be better off, and the consumer can drive faster growth.

Stay tuned, and as always …

Live and Trade With passion My Friends,

 

Griff

 

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