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Weekly eLetter 6/11/2021 -– Inflation or Bogeyman?

The threat of inflation is the dominant story all across the major financial media. This morning we see the new CPI report showing an increase of 4.2% from a year ago. The anticipated number was 3.6%. We know the media loves a bogeyman but are they just crying “Wolf!”. Well, let’s see…

There ARE a few actual inflationary kinds of things going on. For instance, a lot of companies are having to raise wage offers in order to motivate workers to come back to work. That’s a real thing but probably not something with much long-term impact. There’s also a world-wide shortage of computer chips which is causing, in turn, shortages of new cars and trucks, major appliances and so on. Since the chip pipeline is a bit long and complicated this is having another quite real, but also ultimately temporary, effect on prices. A shortage of new vehicles has pushed up prices of used ones, especially trucks. I bet you had no idea that a lack of computer chips would push the value of a 5-year-old F-150 up by several grand. (Used pick-ups in general are showing a YoY increase of 44%! https://www.cargurus.com/Cars/price-trends/ )

And speaking of getting less bang for your buck, there is also a severe shortage of ammo – a fact that cries out for commentary but we’ll just leave it there.

There is also the question of all that stimulus money printed up and distributed by the government which many believe will eventually show up as inflation. Count us among the ones asking that question. So far, we think the answer is ‘someday’.

Oddly, one thing that few observers seem to be talking about is what the current change in the inflation rate is a change from. I do think it is quite significant to recall that, just about a year ago, as the effects of COVID-19 grew to a pandemic and then from a pandemic to a socio-political-economic juggernaut, inflation – as measured/indicated by the CPI – fell to almost nothing. According to the Bureau of Labor Statistics the inflation rates for the months of April, May and June 2020 were 0.3%, 0.1% and 0.6% respectively.

Today, there’s a bit of chatter about whether the novel corona-virus causing all the trouble was man-made. While that question remains unanswered, we have no doubt whatsoever that the related recession was man-made. And a funny thing about things man-made, they often have unforeseen, and sometimes unintended, consequences. A case in point being the price of a barrel of oil — which is an interesting thing to watch when you are talking about inflation. You see, petroleum products are so ingrained into our world that changes in the price of oil can spread rapidly into price changes of all kinds of things. You might say, it’s sort of like a virus.

The pandemic put most of the world’s major economies on the skids beginning in late February 2020. As the movement of goods, services and people came to a near halt supply lines began to back up.

Not surprisingly, with consumption rates falling through the floor, a world oil glut was created forcing the barrel price by April and May of 2020 to fall from sixty-ish down to the 20-dollar range. Indeed, the price of oil for some traders actually went briefly negative because oil traders are not oil consumers — they never want to actually have to take delivery of their orders. However, taking delivery is exactly what a trader must do if he or she has not resold the oil by the contract delivery date. With the pandemic causing oil consumption to drop like a rock, almost immediately oil storage facilities worldwide were rapidly filling up. And if you are obligated to accept your order for, say a million barrels of oil, you better have some place to put it.

Here’s our bottom line: We think the fear of inflation is a bigger issue than actual inflation. While there are legitimate forces present that could be considered inflationary, there are also counter-forces that we think will balance things out. Even the Fed/Treasury money printing venture can be mitigated as long as GDP growth outruns CPI growth; something we consider likely.

So, one can make the argument that today’s inflation blip is mostly about ‘re-flation’ and just making up for lost ground.

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