By now, all know that the CPI for the US reached a multi year
peak of 5.6% measured yr /yr through July. As a result, take home
pay in real terms was slashed, profit margins contracted and all
of the incremental liquidity in the financial system was sucked up
by a rising price level. All this did come to pass from hefty
speculation in commodities even as global growth momentum was
As discussed, my inflation thrust indicator surged sharply starting
in early 2007. Commodities prices, particularly fuels, did the trick.
Other components, such as capacity and labor utilization rates,
ticked down over the interval. The thrust indicator is now coming
down reflecting the negative reversal in the broad commodities
market. Even so, there will be drag effects. Commodites will have
to weaken further in the months ahead just to get the twelve month
CPI back a little below 4.5% by year end '08.
Looking back over the past twenty odd years, there have been five
surges in the thrust indicator, with the last one being the swiftest and
the steepest. After each surge, the indicator has dropped steeply,
and the CPI has followed suit, with the yr / yr CPI % falling by 50%
on average. If the historical behavoir pattern holds, we could look to
a twelve month CPI of 2.8% out there in 2009 at some point. There
is no doubt that at the peak in 2007, global operating rates hit very
high levels. But the speculative run in commodities was so strong,
that a blow out could occur which would take these price indices
down sharply further as weaker demand and modest capacity growth
bring supply and demand into better balance across much of the
spectrum. History does favor the rapid downward adjustment once
demand growth gives out.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!