BarroMetrics Views: Inflation Anyone?
Larry Levin’s Foodflation chart came across my desk the other day. As he said, Yellen dismisses the talk of inflation as ‘noise’. But, for the man in the street, who does not have the luxury of ignoring food and energy, Larry’s chart suggests that inflation is running at 24%. (Figure 1)
For me there are two more important charts to note.
The first is ShadowStats’ Alternate CPI (Figure 2). It suggests inflation is running at 10%. But, that’s what I am not watching. What I am keeping an eye is Point A in Figure 2. If we see persistent readings above A, then I’d say inflation has broken out. Right now we may be seeing the start of a run up.
The second is the FRED AMB graph (Figure 3).
In the past few weeks, we have seen US$4000B ‘resistance’ and it is now testing the lower end of support. A move to US$3,800B would suggest we’ll see a strong stock market correction. More important, it probably means we’ll be seeing upticks in the official CPI. Remember that the AMB graph measures the amount deposited by banks with the St Louis Fed. Right now the FED is paying ‘commercial’ rates for the deposits. So, the banks prefer to park their funds with the FED rather than Man Street.
A decline in the deposits mean that the deposits are being withdrawn. While we don’t know, my guess is withdrawals mean the funds are finding their way to Main Street. If this is correct, we’ll see inflation uptick.
Now add to this the FED minutes of this week: it showed that QE would end in October.
Right now, Wall Street seems to believe the FED will restart QE on any excuse. As long as that belief is in place, we’ll see the stock market’s uptrend continue. So, to see any sort of meaningful downmove, we’d need an external event, a Black Swan, to shake that belief. For the moment, be ‘long or out’.
Let’s see what happens
Figure 1: Foodflation
Figure 2 ShadowStats Inflation
Figure 3: FRED AMB