Inflation Potential

One very probable eventual outcome of a strong liquidity cycle such as the US has been
experiencing is an acceleration of cyclical inflation. QE's 1 and 2 helped push the CPI from
a deflationary reading of -2.1% yr/yr in Jul. 2009 up to +3.9% inflation for Sep. 2011. In
the absence of strong QE until early 2013, the CPI dropped back below 2.0% yr/yr in Apr.
2012 and did not rise above 2.0% again until this spring and then only barely.

The US has experienced a continuing long term decline of Its inflation rate since the early
1980s. There have been periodic cyclical surges that have come when the CRB Commodities
Index rises 10% or more on a yr/yr basis. The mini - surge in the CRB earlier this year
helped boost the CPI from 1% to 2%. CRB Chart

There are a number of factors that have reduced US inflation over the years such as slower
 real economic growth, sharply rising lower cost imports and a progressive but sizable decline
in the growth of wage costs. Even so, the low pass through of higher commodities costs
to the CPI this year has been a surprise. I have been thinking that the CPI could rise to at
least 3% by the end of 2014, but this may be a tough go now.

If you return to The CRB chart, you will see a horizontal green line set at 335 for the index.
That is my educated guess of where supply and demand in the aggregate for this group of
commodities would come into balance. So, from my view there is still excess capacity in these
markets, particularly for grains and fuels. If there is not further firming in global economic
demand, the excess will likely continue, and the sort of sustained upward pressure on pricing
that is needed now to underwrite a further sharp cyclical rise of the CPI % is not likely to
eventuate.