The War on Rising Consumer Prices is Far from Over

March 19, 2024  |  Tim Fortier

While many investors believe the market fallout from surging inflation is largely over, today we’ll take a look into why I believe it’s one of the biggest blind spots investors are missing and its implications.

Inflation is still going up, just at a lower rate than before, and based on how commodities are acting, it has the potential to surge even higher triggering volatility in the markets.

Slowing inflation has been led by a decline in goods prices, China’s exporting deflation, as well as declining energy and commodity prices. But now, all of that may be coming to an end. Here’s why…

The most recent report showed that for the year ending January 2024, the Consumer Price Index for All Urban Consumers increased by 3.1 percent (not seasonally adjusted). Food prices rose 2.6 percent, while energy prices decreased 4.6 percent.

But as the following charts show, further increases look more and more likely.

Let’s start with a chart of the Goldman Sachs Commodity Index (GSCI) represented by the iShares GSCI ETF (GSG).

The S&P GSCI™ is world-production weighted; the quantity of each commodity in the index is determined by the average quantity of production in the last five years of available data.

Such weighting provides the S&P GSCI™ with significant advantages, both as an economic indicator and as a measure of investment performance.

Currently, the S&P GSCI™ contains 24 commodities from all commodity sectors: Six energy products, five industrial metals, eight agricultural products, three livestock products, and two precious metals.

As this weekly chart displays, the price has been consolidating and is now beginning to rise, while it has remained above its long-term moving average (yellow line).

Energy is the largest component of the index with a near 60% weight with grains (wheat, corn, soybeans) coming in second with a 15% index weighting.

However, agricultural commodities just surged above the Russian invasion levels, reaching near-decade highs.

Leading the agricultural index higher with a 21.4% index weight is cocoa whose price has tripled (sorry chocolate lovers) in recent months due to lower crop yields coupled with rising global demand.

Live cattle prices are not helping either. As the second largest component of the agriculture index (11.81%), prices are surging to new highs.

The reason behind this is that at the onset of 2024, our national cow inventory is the lowest since the early 1960s, and prices of calves, yearlings, fed cattle, and cull cows are historically high.

This surge in agriculture prices is expected to have significant implications for global inflation, potentially driving higher food prices.

It’s worth noting the strong link between agricultural commodities and the equal-weighted commodities index, indicating that other natural resource prices are likely to follow a similar upward trajectory.

Additionally, you’ve probably noticed that energy prices are creeping up again at the pump. This is partly because we’re entering the season of higher demand, especially with the summer driving season kicking in.

Gold has broken out to new highs and copper, shown below, is also beginning to climb… more signals that inflation is not yet tamed.

And let’s not forget about bonds. The bond market is sending its own message as the yield on the Ten-Year Treasury Note continues to rise.

The NFIB survey of small businesses asked 10,000 firms if they plan to increase selling prices over the next three months. The recent rise in the share of firms saying “yes” also suggests that inflation could increase over the coming months.

The war on rising consumer prices is likely far from over and a potential policy shift by the Fed should only add fuel to the inflation fire.

Safe investing,

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