Creeping Inflation Concerns?

As we enjoy the warming temperatures of a budding spring, the US Labor Department reported on Friday a warming trend of a whole different nature. The March PPI results came in “hotter” than expected. The producer-price index rose 1% from the prior month. This increase was both double the rate in February and double the rate of increase anticipated by economists’ estimates. Core inflation (excluding food and energy) rose 0.7%, which was also much higher than expected.

The US numbers followed on the heels of another hotter-than-expected PPI number out of China late Thursday. Taken together, the reports put added attention on the inflation theme, and also speak to the global reach of this increasing price pressure. Given the skewed base-level comparisons against last year’s numbers amid the Covid crisis, year-over-year comparisons can be dismissed more easily, but these month-over-month increases over estimates are noteworthy. Time and again the Fed downplays inflation concerns, belittling any price increases as “transitory.” As recently as Thursday, Fed Chairman Powell was at it again, expressing much more concern over increasing Covid numbers than inflation.

The case for downplaying inflation data as merely a temporary Covid-related distortion that will soon pass may satisfy some, but it’s worth noting that Fed Chairman Powell is not the only opinion in the room. Economist Ken Rogoff recently stated in a Project Syndicate article that, “the real inflation risk could materialize if both central bank independence and globalization fall out of favor.” On globalization, there are numerous indications that that is precisely what is happening. Public skepticism over globalization has become much more widespread in the last decades.

This is largely attributable to the growing perception that globalization has hurt domestic labor and increased wealth inequality. Global trade relations have been deteriorating and large demographic issues pose serious obstacles as well. Interestingly enough, Rogoff’s other concern of “central-bank independence” is the central issue that has moved another MWM favorite, Russel Napier, into the inflation camp. Speaking to the initiation of the government policy to guarantee various bank loans, Napier said in a recent article “we will get inflation. And more importantly, the control of money supply has moved from central bankers to politicians. Politicians have different goals and incentives than central bankers. They need inflation to get rid of high debt levels. They now have the mechanism to create it, so they will create it.”

There are many fundamental reasons to have inflation concerns, but, as always with inflation, expectations are incredibly important. At present, a real factor supportive of lower inflation is that the public has largely become acclimated to low inflation. In this circular reasoning, years of low inflation create expectations for more of the same in the future. Hotter-than-expected data releases, as mentioned above, along with increases in the breakeven rate, can start to change this dynamic. On the heels of massive fiscal and monitory stimulus, and on the verge of the next expected $2.5 trillion, loosely defined “Infrastructure bill” spend, any data speaking towards higher-than-expected inflation is significant.

There are some indications that price increases are starting to affect businesses. Some companies are starting to pass those costs on to customers, a move that indicates those companies are planning for more than a “transitory” bout of material price increases. On the threshold of corporate earnings season, we will be watching this development very closely at MWM. Next Tuesday, April 13, the Government will report March CPI numbers as well.

The US dollar and the rally it has staged since the beginning of the new year also came into focus this week. To provide context: from the eruption of the Covid crisis to the end of 2020, the dollar declined from over the 100 level to around 89. That significant decline was in the face of expectations for extreme emergency monetary and fiscal policy to right the Covid ship. After finding it’s footing at the start of 2021, the dollar has staged a comeback. Last week, the dollar rally reached a high of 93.47, and came within a thin sliver of the declining 50-week moving average before slumping into a quick retreat this week below 92.25. This dollar decline is the biggest weekly drop so far this year.

Adding a bit of a bearish weight to the dollar’s slide, the February US trade deficit outpaced estimates, and widened to a record $71.1 billion. The number represented a 4.8% increase over last month. It remains to be seen if the dollar is ready to resume a decline or if this week’s weakness is just a short-term correction before the dollar resumes higher. We will continue to monitor the dollar and it’s impact on hard assets.

As for weekly performance: in the precious metals space, the yellow metal was up 0.95%; silver was up 1.48%; platinum was flat, up just 0.06%; while palladium lost 0.56%. Gold miners outperformed the metals again, as seen by the HUI Gold Miners Index, up 2.42%. IFRA, the I Shares US Infrastructure ETF, was up 0.11%.

Energy took a hit this week. Oil was down 3.47%, while natural gas prices declined 4.13%. Oil Services stocks (OIH) led energy to the downside, dropping 6.24% on the week. The CRB Commodity Index was flat, up 0.02%. The Dow Jones US Real Estate Index ended the week up 0.40%, while the Dow Jones Utilities was up 1.46%. The US Dollar Index lost ground on the week, down 0.83%. The dollar’s decline was its worst weekly performance of the new year. The yield on the 10-year Treasury was down 2 bps.

Enjoy the weekend!

Best Regards,

David McAlvany
Chief Executive Officer
MWM LLC