For the past few years the lack of inflation has been somewhat of an enigma. Rapid growth in the economy. Rapid job growth. Extreme low unemployment rates. Yet no real inflation. It has been the bane of the macro trader as they continued to bet on rising inflation only to never have it show up. But that seems to be changing now. oil prices are rising and look strong. Commodities prices are also rising.
This has shifted the debate at the Fed away from whether they needed to raise short-term interest rates, to how many times this year do they need to raise them to stay in front of inflation. While the bond traders and economists debate this issue with the Fed the signs continue to signal inflation is a growing threat. The chart below of the CRB Index tells the tale.
The CRB is a broad index comprised of 19 commodities: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gas and Wheat. It does not look at housing, a large component of broad inflation measures, but you can see covers a lot of what consumers purchase. The chart shows the sharp and prolonged fall in the CRB Index into the low in 2016. After a bounce it stabilized then and has moved sideways for 2 years.
It started to change character in January. That is when the CRB Index pushed above the levels that had contained it since May 2016. It was a short lived move as it fell back. The drop stopped at a higher low, continuing a series of higher lows, an uptrend. And 2 weeks ago moved back over that resistance again. Now it is at a 2 and a half year high and threatening to confirm a major reversal to the upside. Inflation is coming back. Time to prepare for it.
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