{"id":49930,"date":"2024-03-16T00:28:58","date_gmt":"2024-03-16T00:28:58","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=49930"},"modified":"2024-04-17T23:20:00","modified_gmt":"2024-04-17T23:20:00","slug":"what-really-drives-inflation","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2024\/03\/16\/what-really-drives-inflation\/","title":{"rendered":"What really drives inflation?"},"content":{"rendered":"

Every month, after the FOMC meeting, Fed Chairman Jay Powell fronts the media and tells everyone how the Fed is determined to maintain the fed funds rate in the same 5.25% – 5.50% range in order to contain inflation. But he is well aware that the Fed funds rate has had close to zero impact on inflation.<\/p>\n

CPI peaked in June 2022 when the fed funds rate was an eye-watering (sic) 1.25%. CPI then plunged sharply when the Fed was still in the early stages of hiking rates. The lag between rate hikes and the resultant decline in inflation is normally 12 to 18 months. Now the Fed would have us believe that CPI declined in anticipation<\/em> of rate cuts.<\/p>\n

\"CPI<\/p>\n

Financial conditions did tighten when the Fed introduced QT, with the Chicago Fed Financial Conditions Index (FCI) rising to -0.1%. But then FCI started a sharp decline in June 2023, when the Fed was still hiking rates, indicating monetary easing.<\/p>\n

\"Chicago<\/p>\n

<\/a><\/p>\n

Rising interest rates and tighter financial conditions had even less than usual impact on consumer spending because of a strong upsurge in personal savings during the pandemic. A large percentage of government transfers were not spent but went to increase bank deposits.<\/p>\n

\"Government<\/p>\n

Energy is driving inflation<\/h2>\n

The primary cause of the strong upsurge in CPI in ’21\/22 was energy prices. The chart below shows how energy CPI (orange) led CPI (red) higher, reaching a peak of 41.5% in June 2022 — the same month that CPI peaked at 9.0%. Energy prices then plunged to a low of -16.7% in June 2023. CPI followed, reaching a low of 3.1% in the same month. Since then, CPI energy has recovered to close to zero, producing a floor in the annual CPI rate.<\/p>\n

\"CPI<\/p>\n

Energy CPI is a relatively small component of CPI — 6.6% of total CPI — but it is a major cost component of most other variables. Food, for example, requires energy for planting, irrigation, harvesting, processing, refrigeration and transport. Cement requires energy for heating limestone in kilns, crushing and transportation. Steel needs energy for extraction and transport of iron ore, smelting and transportation. Even online services. The latest AI data centers require up to 1 GW of electricity capacity — enough to power 300,000 homes.<\/p>\n

The most important determinant of energy prices is crude oil. Nymex light crude peaked between March and June 2022 at prices of $100 to $120 per barrel before commencing a prolonged decline to between $70 and $80 by December of the same year.<\/p>\n

\"Nymex<\/p>\n

Conclusion<\/h2>\n

Raising the fed funds rate has had little impact on actual inflation. Rate hikes are more about restoring the Fed’s credibility as an inflation hawk after a disastrous performance in 2021. High energy prices and easy monetary policy and were a recipe for inflation.<\/p>\n

\"CPI<\/p>\n

The sharp decline in CPI in the 12 months to June ’23 was caused by falling energy prices. Energy CPI fell from an annual increase of 41.5% in June 2022 to a low of -16.7% a year later.<\/p>\n

Nymex light crude has now broken resistance at $80 per barrel. Expect retracement to test the new support level but respect is likely and would confirm another advance, with a target of $90 per barrel.<\/p>\n

\"Nymex<\/p>\n

A sharp rise in crude prices would be likely to cause a significant upsurge in CPI — and long-term interest rates. With bearish consequences for stocks and long-duration bonds.<\/p>\n
\n

<\/p>\n

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Every month, after the FOMC meeting, Fed Chairman Jay Powell fronts the media and tells everyone how the Fed is determined to maintain the fed funds rate in the same 5.25% – 5.50% range in order to contain inflation. But he is well aware that the Fed funds rate has had close to zero impact … <\/p>\n

Continue reading “What really drives inflation?”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,44,13,34],"tags":[5791,5635,854,6379,1353,5024,1828,2529],"class_list":["post-49930","post","type-post","status-publish","format-standard","hentry","category-the-fed-banks-interest-rates","category-crude-oil-natural-gas","category-inflation-economy","category-us-canada-countries-regions","tag-chicago-fed-financial-conditions-index","tag-commercial-bank-deposits","tag-cpi","tag-energy-cpi","tag-fed-funds-rate","tag-government-transfers","tag-inflation","tag-nymex-wti-light-crude"],"yoast_head":"\nWhat really drives inflation? - the patient investor<\/title>\n<meta name=\"description\" content=\"Every month, after the FOMC meeting, Fed Chairman Jay Powell fronts the media and tells everyone how the Fed is determined to maintain the fed funds rate in the same 5.25% - 5.50% range in order to contain inflation. 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He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.","sameAs":["https:\/\/facebook.com\/people\/The-Patient-Investor\/61572934660810\/","https:\/\/www.instagram.com\/colin_thepatientinvestor","https:\/\/au.linkedin.com\/in\/colintwiggs"],"url":"https:\/\/thepatientinvestor.com\/index.php\/author\/investor\/"}]}},"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p9tQ4n-cZk","jetpack_likes_enabled":false,"jetpack-related-posts":[{"id":33615,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/05\/27\/chances-of-a-recession\/","url_meta":{"origin":49930,"position":0},"title":"Fed rate hikes and a recession","author":"Colin Twiggs","date":"May 27, 2022","format":false,"excerpt":"Larry Summers warns that we are headed for a recession within two years: \u201cIf you look at history, there has never been a moment where inflation is above 4% and unemployment is below 5% where we did not have a recession within the next two years.\u201d (Barrons) What is interesting\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"CPI","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-05-27-cpi.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-05-27-cpi.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-05-27-cpi.png?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-05-27-cpi.png?resize=700%2C400&ssl=1 2x"},"classes":[]},{"id":41631,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/04\/13\/inflation-ebbs-and-flows\/","url_meta":{"origin":49930,"position":1},"title":"Inflation ebbs (and flows)","author":"Colin Twiggs","date":"April 13, 2023","format":false,"excerpt":"The consumer price index (red below) declined sharply to 5.0% for the 12 months to March, compared to 6.0% in February. But core CPI increased slightly to 5.6%, from 5.5% one month earlier. Monthly core CPI was softer, at 0.38%, but the rate seems to be steadying at around 0.4%,\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"CPI & Core CPI","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-04-12-cpi.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-04-12-cpi.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-04-12-cpi.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":43191,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/07\/27\/more-than-two-rate-hikes-ahead\/","url_meta":{"origin":49930,"position":2},"title":"More than two rate hikes ahead?","author":"Colin Twiggs","date":"July 27, 2023","format":false,"excerpt":"The FOMC announced another 25 basis point rate hike on July 26. The target maximum of 5.50% is the highest level for the fed funds rate in 22 years. Inflation is falling, with monthly CPI and core CPI (annualized) close to the Fed's 2.0% target. We expect an uptick in\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Fed Funds Rate Target - Maximum","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-07-26-fomc.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-07-26-fomc.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-07-26-fomc.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-07-26-fomc.jpg?resize=700%2C400&ssl=1 2x"},"classes":[]},{"id":36317,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/08\/11\/cpi-dips-but-rate-hikes-likely-to-continue\/","url_meta":{"origin":49930,"position":3},"title":"CPI dips but rate hikes likely to continue","author":"Colin Twiggs","date":"August 11, 2022","format":false,"excerpt":"CPI dipped to 8.5% for the 12 months to July. But this still leaves the Fed way behind the curve, with a real Fed funds rate of -6.0% (8.5%-2.5%). Monthly CPI figures, however, show a sharp slowdown, with CPI falling 0.01% in July (-0.14% annualized rate). The primary cause is\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"CPI","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-08-10-ffr--cpi.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-08-10-ffr--cpi.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-08-10-ffr--cpi.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":31448,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/03\/11\/cpi-about-to-go-through-the-roof\/","url_meta":{"origin":49930,"position":4},"title":"CPI about to go through the roof","author":"Colin Twiggs","date":"March 11, 2022","format":false,"excerpt":"Consumer price index (CPI) grew at 7.91% for the 12 months ended February. Hourly wage rate increases are likely to follow. Money supply (M2) growth slowed to 12.65% in January but past experience in the 1970s and 80s shows that inflation peaks may lag M2 peaks by several years. Another\u2026","rel":"","context":"In "Deficit Spending & Employment"","block_context":{"text":"Deficit Spending & Employment","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/deficit-spending-employment\/"},"img":{"alt_text":"CPI & Hourly Wage Rates","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-03-11-cpi-wages.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-03-11-cpi-wages.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-03-11-cpi-wages.png?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-03-11-cpi-wages.png?resize=700%2C400&ssl=1 2x"},"classes":[]},{"id":38318,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/10\/25\/the-fed-inflation-lessons-from-the-past\/","url_meta":{"origin":49930,"position":5},"title":"The Fed & Inflation: Lessons from the past","author":"Colin Twiggs","date":"October 25, 2022","format":false,"excerpt":"In 1974, the Fed, under Chairman Arthur Burns, succumbed to political pressure from the White House and cut rates while inflation was still strong. The FOMC had hiked rates to contain a burst in inflation from the 1973 Middle East oil embargo but then cut too early -- from 12.9%\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Fed Funds Rate & CPI","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-10-24-cpi-ffr-70s.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-10-24-cpi-ffr-70s.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-10-24-cpi-ffr-70s.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/49930","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=49930"}],"version-history":[{"count":6,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/49930\/revisions"}],"predecessor-version":[{"id":50130,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/49930\/revisions\/50130"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=49930"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=49930"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=49930"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}