Almost a year ago we noted that the rapidly rising price of oil and gas would contribute to alarming CPI prints [see: Don’t Ignore Inflation.]
Punch line? Oil and gas will have to fall significantly by April or we’re looking at a 20%+ YoY increase in gas prices – which has historically produced 2.4-2.7% annual inflation and a 2%+ 10Y.
At the time, it was clear that the base effect would ultimately generate YoY deltas in gasoline that would exceed 40% and, if the correlation held, generate CPI over 3.5%. We were being too conservative. November’s delta should be around 62% and October CPI reached 6.22%.
Then…
…and now.
When inflation spilled over into stickier categories such as food, shelter and wages, CPI accelerated more than the rise in oil/gas prices alone would justify. As the chart above illustrates, CPI’s rate of change outpaced that of gasoline alone.
Investors finally began to notice. Maybe inflation wasn’t transitory after all. Rising interest rates suddenly became a concern rather than a bullish confirmation of the reflation trade.
In our last update on oil and gas [see: Nov 19 Update] we reiterated the fact that oil and gas deltas would need to be held in check if inflation and interest rates were to stabilize.
Regardless of where this correction peters out, November should mark a turning point in CPI, with December and future months declining back towards an “acceptable” level. The trick is to keep interest rates from breaking out, which means the Fed must put the brakes on inflation right here and now.
Friday’s plunge was a good start. CL came within 0.8% of our downside target, shedding nearly 14% on the day and over 21% from its October highs.
It’s too early to say whether the omicron variant will feature the sort of transmission and mortality rates that could send the global economy into another tailspin. But, one thing is clear: non-OPEC+ countries are breathing a sigh of relief at the correction in energy prices – even if it means more downside for equities.
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Bancel’s comments might also apply to this morning’s testimony from Jay Powell and Janet Yellen who head to Capitol Hill to explain why 6.5 inflation is nothing to be concerned about.
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