The economic indicators are flashing red: oil and gold, historically early harbingers of inflation, are sending clear signals that another wave of inflation is on the horizon. When these two commodities rise above their median prices, inflation typically follows in other sectors one to three years later. Currently, oil remains historically elevated despite its volatility, and gold is at an all-time high.
If history is any guide, this pattern mirrors the post-World War II era and the 1970s, periods marked by successive waves of inflation. During those times, the critical mistake was interpreting a temporary lull between inflationary waves as a victory, leading to premature easing of monetary policy. The Federal Reserve, it seems, is poised to repeat this error.
Consider the evidence:
- Historical Trends: In both the 1940s and the 1970s, inflation surged in three distinct waves. Each time, a misreading of the situation led to a softening of monetary policy during a trough, only to be hit by another inflationary spike shortly after.
- Current Commodity Prices: Oil’s price fluctuations aside, it has stayed above its historical median, signaling sustained inflationary pressure. Gold’s surge to record highs further corroborates this trend.
- Federal Reserve’s Actions: The Fed’s recent actions and declarations reflect a dangerous complacency. Celebrating “mission accomplished” during a temporary lull in inflation is premature and echoes past mistakes.
Jerome Powell’s recent comment about not seeing the “stag” or the “flation” of stagflation was a glaring misstep, emblematic of a broader underestimation of the inflation threat. This attitude has led the markets to incorrectly price in multiple rate cuts this year, spurred by unfounded optimism. The belief that inflation was transitory allowed it to escalate near 10% before the Fed took significant action—a critical blunder.
The implications are severe. If the Fed cuts rates now, it risks unleashing another wave of inflation, compounding the economic turmoil. This potential mistake could become the third significant misjudgment by Powell’s Fed in just three years, following the delayed response to rising inflation and the premature declaration of victory.
Investors, policymakers, and the public should heed these warning signs. Oil and gold are not merely commodities; they are economic barometers. Ignoring their signals could lead to another catastrophic inflationary wave, exacerbating the financial strain on households and destabilizing markets further. The Fed’s habit of premature celebration and misreading economic indicators must end, or the consequences could be dire.
Economic chart of the day: oil and gold have historically been early indicators of a new inflationary wave.
When these two commodities rise in price above their medians, inflation in other parts of the economy have traditionally followed one to three years later.
Obviously, oil… pic.twitter.com/hEVArhbxKy
— Uncle Milty’s Ghost (@his_eminence_j) May 22, 2024