Dude, Where’s My Inflation?

It’s been over half a year since QE3 was launched by the Federal Reserve. Of course, just like previous $FED actions, this was viewed as inflationary. Back on October 15th 2012, a month after the launce of QE3, I argued that the “QE3 Inflation Trade” was a big time fail. However, people argued that since the Monetary Base (MB) was not expanding, the effects of inflation would not be felt (the reason it was not expanding is because of the nature of MBS trades and clearing time). But now that the MB is expanding, has it led to increased inflation? To answer that question I will take a look at a few charts.

The Charts

Well, let’s take a look at the numbers for Inflation from the government (CPI) and from a private source (MIT). As you see, from the first week of QE3 (Started Sept 14), both the CPI and MIT Index have remained tame. There has been no unusual jump in inflation for years that so many have been calling for.

BPICPI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What about commodities? Have they jumped? Maybe these inflation indices don’t capture true price increases and/or are manipulated.

So let’s take a look at the main commodity index and the half-year performance (its been a little over 6 months since QE3 was launched) of some commodities.

$CRB Commodity Index

CRBQE3

 

 

 

 

 

 

 

 

 

 

 

 

 

Half-year Performance of Commodities

As you see, nothing out of the ordinary here. Some commodities are up, some are down, and some are flat. And Gold, a favorite “measure” of many hard-money conservatives, is down 10% since then. doesn’t sound so inflation-y to me.

FinVizHalfYearQE3

 

 

 

 

 

 

 

 

 

 

 

 

 

OK, so there has been no price or commodity increases, but the dollar has surely gone down right? Not really. The dollar has actually rallied hard lately (and has broken out), and is up almost 5% since the day QE3 started (and up ~5% also YoY). In fact, the dollar bottomed (!) on the day QE3 started.

$USDX Weekly Chart

USDXweekly

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What about inflation expectations? Surely that is rising b/c of the $FED.

Not really. Below is a chart of the 5-year (blue) and 10-year (red) breakevens. We saw a spike initially when QE3 was announced (mid-September 2012), but since then have topped.

Breakevens

And here is the University of Michigan measure. Nothing out of the ordinary either.

UM Inflation Exp

 

Concluding Thoughts

So, is the Federal Reserve powerless? Can it not create inflation? I don’t think the answer is that easy as the two extreme spectrums (Market Monetarists on one side, and Austrian Gold-Bugs on the other) make it out to be. The economy is much more complex and runs on more stuff than just the FED’s actions. While the FED has done a good job in maintaining a floor and keeping along with the long-term trend, it has been my long-time assertion  that to get the economy over-heating, then we must see some strong demand coming through (or a big time supply-side disruption). I actually think this (demand-pull inflation) will happen later this year, but for now, the “big, scary inflation monster isn’t out there”. So no, Inflation isn’t always and everywhere a monetary phenomenon.

But I do think we are seeing a “waning effect” of QE real-time, something others have been barking at for awhile now. Investors and market participants are not viewing the FED’s measures as super-inflationary anymore. In fact, one of the biggest guys known for being pro strong-dollar for a long time actually had a change of mind recently. If Larry Kudlow could do it, then so can most participants.

As for how we should view inflation? Well for one, we must take a longer-term view on it and measure it based on relativity. Inflation should be always be a “frenemy“, but we must also welcome chronic good deflation if it comes (which I have a feeling it might over the next decade).

Next week, I take on the Bank of Japan and Abenomics!

Tags: $MACRO $FED $CRB $GLD $USDX $UUP $SLV $DBC

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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