Preparing for Higher Inflation

The graph below shows the historical relationship between the annual change in the oil price and the year-on-year change in the U.S. Consumer Price Index. Should the oil price remain around current levels, the CPI is bound to rise markedly.

It comes as no surprise that gold bullion and Treasury Inflation-Protected Securities, or TIPS, have been relatively solid performers over the past few months.

Click to enlarge:

Source: Plexus Asset Management (based on data from I-Net Bridge)

Comments

[Dave Wrixon:]

Guard against inflation?

How about going to live in Switzerland?

Nov 03 03:59 AM

[Francois Soto:]

I confirm the energy threat for the CPI All Items with these additionnal charts:

static.seekingalpha.co...

However only energy/commodities may cause some upward pressures on the CPI All Items because both the CPI Core and the CPI Food are definitely not turning around any soon. I am not sure if the CPI All Items will catch up completely the gap you display on your chart but probably some part of it.

Regards,

Francois Soto
EMphase Finance
emfin.com

Nov 03 04:14 AM

[JeffDB:]

On Nov 03 04:14 AM Francois Soto wrote:

> However only energy/commodities may cause some upward pressures on
> the CPI All Items because both the CPI Core and the CPI Food are
> definitely not turning around any soon. I am not sure if the CPI
> All Items will catch up completely the gap you display on your chart
> but probably some part of it.

It seems to me that to the extent that the Core CPI & food respond in similar ways to the same variables as the oil prices, that the relationship will be likely to continue. I'm still of the opinion that Milton Friedman was right when he said that "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."

Given that M1, the monetary base, has jumped sharply recently, and that oil, gold and other commodities have followed, it would seem to me that it is fairly likely that the CPI will follow in time.

Chart of the monetary base for the last 5 years, courtesy of the Federal Reserve:

research.stlouisfed.or...[1][id]=CURRDD&s[1...

tinyurl.com/ygfs6c6

Nov 03 12:51 PM

[cyclingscholar:]

Prood that the CPI is a reliable measure of inflation and that oil, as a raw material, is a reliable leading indicator of the same.

Nov 03 03:02 PM

[Mr. Big:]

If it were any other currency besides the US dollar, you can be assured there would be high inflation....perhaps even hyperinflation. However, the matter is more complicated because the US dollar is the world's sole reserve currency and is the currency to which all commodities are priced. This generates a constant demand for dollars, as even the simplest of transactions require someone to hold an inventory of US denominated securities.

This implies that the ill-effects of the massive increase in the U.S. money supply is actually being materially absorbed by nations around the world...particularly by those countries who are primary exporters and by those countries who are net creditors. But as these negative effects cumulate over time, there will be increased pressure for an alternative medium of exchange. When US dollars are no longer the standard currency for transactions, you can bet there will be a mass "dumping" of the overvalued US currency, thereby leading to high inflation (or hyperinflation). This will happen almost instantaneously....as interest rates must skyrocket in order to stabilize the free-falling dollar and to attract investors to buy Treasuries again.

This crisis is far from over....

Nov 03 03:40 PM