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Inflation Concerns May Be Completely Overblown

By Michael KramerMarket OverviewMar 05, 2021 09:59AM ET
www.investing.com/analysis/worries-over-inflation-may-be-completely-overblown-200565202
Inflation Concerns May Be Completely Overblown
By Michael Kramer   |  Mar 05, 2021 09:59AM ET
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The article was written exclusively for Investing.com

Investors are starting to get nervous about inflation rates picking up, and who can blame them. The latest data from the ISM prices paid indexes showed a significant uptick in costs—to their highest levels in years. Additionally, prices for commodities such as oil and copper have exploded higher from their spring 2020 lows. This has sent bond yield surging and put the stock market on shaky ground. 

Whether inflation is here to stay over the long-term is hotly debated. Still, there are plenty of signs suggesting that a spike in many of these key inflation indexes will only be temporary. Oil prices were so low last spring that the commodity owner quite literally had to pay someone to take it off their hands, trading to around negative $40 per barrel. 

Oil Daily
Oil Daily

Not As Bad As It Seems

These low prices weren’t just in oil; industrial metals such as copper traded for around $2, and now the metal trades at almost $4. There are many reasons why prices fell so sharply and have now rebounded massively; from supply constraints to global demand accelerating, it makes no difference. However, the year-over-year metrics will make it seem as if prices rose dramatically, and they really haven’t. It means that the bond market could be getting itself all worried for no reason. 

As the spring of 2020 prices begins to drop off the comparables, the pace of inflation should start to normalize and return to a rate seen before the pandemic. Oil prices, for example, are precisely at the same price they were in at the beginning of January 2020. Meanwhile, natural gas appears to be trading around the same prices seen throughout most of 2017 and 2018. Gasoline prices have returned to their summer of 2019 levels. 

Correlations

Readings in the PPI and CPI are likely to move sharply higher in the months ahead. That is because many commodities, like oil, are positively correlated to the index. It seems entirely possible that over the next few months, the PPI and CPI readings will climb dramatically on a year-over-year or month-over-month basis. But those sharp changes should begin to normalize by some time in the summer of 2021 and start to decline over time. Many commodities settled down during the summer of 2020, and their rate of change began to slow.  

PPI And CPI Y/Y Change
PPI And CPI Y/Y Change

Have We Seen This Show Before?

Something similar happened following the 2008 recession when prices fell sharply. Then as the economy recovered, prices for commodities began to rise. This sent the consumer price index sharply higher until September 2011, when it peaked at a year-over-year change of 3.9%. The CPI has declined ever since and has yet to rise back to 3%, let alone 3.9%.

CPI % Change
CPI % Change

Perhaps this time will be different. In the 2008 recession, the CPI turned negative from May of 2009 until October of 2009. It is impossible to know for sure, but the key may be to follow some commodities. If those prices begin to flatten out, then it likely means that inflation rates will flatten out. Many people will point to rising levels of M2 as a sure sign inflation will come. But money printing alone does not produce inflation; there needs to be an increase in demand. 

It might mean the bond market is all worried for no reason. Who knows, it could even create an incredible buying opportunity for stocks.

Inflation Concerns May Be Completely Overblown
 

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Inflation Concerns May Be Completely Overblown

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Comments (45)
Viking Fire
Viking Fire Mar 06, 2021 1:27AM ET
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May be? Just look at histort lol of course its overblown
Joseph Lee
Joseph Lee Mar 05, 2021 7:55PM ET
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This seems to be a lousy analysis, done with too much nonchalance.
The Chad Bull
The Chad Bull Mar 05, 2021 4:56PM ET
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You cannot print your way to prosperity.
Viking Fire
Viking Fire Mar 05, 2021 4:56PM ET
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Well, when your people live better than 99% of the world, especially the garbage living chinese deal with, dont really need to. Things are already pretty good.
andrew lee
andrew lee Mar 05, 2021 4:10PM ET
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inflation in the US is caused by trade war. all the tariffs on china is being priced in the goods.. thank trump
andrew lee
andrew lee Mar 05, 2021 3:43PM ET
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is inflation the best they can do ? we been thru real issues in 1930, oil 1970s,dot. com bust, 1998 asian crisis, 2008 GFC, 2020 covid .... each time good stocks rebounded.. now they worried about inflation? factories in asia can double production easily to counter demand. this is just a gimmick to bring prices lower, so that funds can buy. no way they can report a 1.6%yearly return on bonds. they'd lose their jobs
Billy Bilnaad
Billy Bilnaad Mar 05, 2021 3:09PM ET
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I agree stocks are for sale. Buy the dip
flashflash accounting
flashflash accounting Mar 05, 2021 3:02PM ET
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Please use some common sense, it doesn't need 4-year finance degree.
Heine Pedersen
Heine Pedersen Mar 05, 2021 1:58PM ET
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Wonder why the demand for bullion is so high then 🤔
Cathy Bartlett
Cathy Bartlett Mar 05, 2021 1:02PM ET
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Yeah right!! Inflation is coming folks!! The road to serfdom lies before us...
Lawrence Abbott
Lawrence Abbott Mar 05, 2021 12:37PM ET
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it's not temporary because the FED is not even thinking about thinking about raising interest rates and unemployment is still up with even greater incentive to stay home due to stimulus and lingering pandemic concerns. on top of that, the return to the work force here in the US, you have to ask, what work force? It's negligibly weak and propped up by forbearances and bailouts. The amount of printing they'll need to do to keep interest rates low on top of bailouts is insane. This is just the beginning.
Ram Shivlundpujari
Ram Shivlundpujari Mar 05, 2021 12:35PM ET
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Why people like you compare electronics or something which is cheaper with food??
Hal Hildebrand
Hal Hildebrand Mar 05, 2021 12:32PM ET
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Inflation in food is real and is now.... and what about a MSRP of $67,000 for a jeep Wrangler.. your 40k for a Camry?.. yeah inflation is real and is because the Dollar is diluted from shear numbers of it printed...
Sol Wein
Sol Wein Mar 05, 2021 12:32PM ET
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Please fire yourself for such a ridiculous suggestion
Francesco Lucchesi
Francesco Lucchesi Mar 05, 2021 12:27PM ET
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wait for those yields hitting 2/3. Jerome will turn green
Francesco Lucchesi
Francesco Lucchesi Mar 05, 2021 12:26PM ET
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overblown? what planet you live on ?
嘉偉 吳
嘉偉 吳 Mar 05, 2021 12:25PM ET
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not overblown, do you go to supermarket everyday?
嘉偉 吳
嘉偉 吳 Mar 05, 2021 12:25PM ET
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the most inflation will be the salary.when you sell everything, don't forget the salary.
嘉偉 吳
嘉偉 吳 Mar 05, 2021 12:25PM ET
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Basic wage
Dann schafer
Dann schafer Mar 05, 2021 12:21PM ET
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anyone bought groceries lately???
Dann schafer
Dann schafer Mar 05, 2021 12:21PM ET
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bought groceries lately???
Mario tragik
Mario tragik Mar 05, 2021 12:18PM ET
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Writer is long AAPL & TSLA
Francesco Lucchesi
Francesco Lucchesi Mar 05, 2021 12:18PM ET
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explains it all
DrFunkenstein hayson
DrFunkenstein hayson Mar 05, 2021 12:18PM ET
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according to Jerome Pinocchio Powell there's no inflation. and we can always trust the bankers because they always tell the truth and they always have our interests at heart. Hahahaha comical
DrFunkenstein hayson
DrFunkenstein hayson Mar 05, 2021 12:16PM ET
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hahaha. this won't age well.
Loren Boston
Loren Boston Mar 05, 2021 12:14PM ET
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Gotta time stamp this one!
Loren Boston
Loren Boston Mar 05, 2021 12:14PM ET
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Let's time stamp this one!
Jermaine .A
Jermaine .A Mar 05, 2021 12:13PM ET
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Base metals, agricultural commodities, oil, housing, and now the bond market seem to disagree.
John Gasillt
John Gasillt Mar 05, 2021 12:12PM ET
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what happens when there are record Money stock levels at the same time that the Stock, Bond, and Crypto markets are dropping at the same time? Where is all that money going to flow to?
 
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