Commodity Insight: Whistling in the dark

The Consumer Price Index report for November showed U.S. inflation eased to 7.7% annual rate from 8.2% in September. The slowdown with inflation was so bullish the Dow Jones Industrial Average rose nearly 1,200 points, the best one-day gain since 2020.

The smaller-than-expected rise in consumer prices gave investors and traders hopes that inflation may be cooling. But based on history, investors and traders may be whistling in the dark and getting too bullish too soon.

However, it does seem high in probability that inflation is cooling down based on the recent CPI report.

But understand the goal of the Fed is to hike interest rates high enough to send inflation back to 2% and lower. Based on history, the Fed may have to keep interest rates higher for longer to get that chore done.

“Historically, it takes an average of 10 years for a developed economy to return to 2% inflation once the 5% threshold is breached,” the Bank of America says in a recent note.

And CNBC posted an article with a headline, “Inflation cooled more than expected — but prices are still up 7.7% since last year.”

CNBC went on to state: “But rate hikes don’t affect prices right away. They have a lag effect that can last several months, if not years, based on who you ask. This might explain why inflation has hovered around 8% for most of the year, despite all the interest rate increases since March.”

CNBC listed the big gains with inflation based on data from the Labor Department:

• Airline fares: 42.9%

• Gas: 17.5%

• Bread: 14.8%

• Electricity: 14.1%

• Food at home: 12.4%

• New vehicles: 8.4%

• Food away from home: 8.6%

• Used cars and trucks: 2%

• Shelter: 6.9%

• Medical care services: 5.4%

• Apparel: 4.1%

As you can see, the rise with inflation is broad-based. Very broad-based.

Barron’s also weighed in on just how long inflation would remain elevated, with a headline, “Inflation Tends to Linger. How Long Will It Last This Time? We’re Very Worried.”

If Barron’s contacted the Bank of America about how long inflation can remain elevated and hang around, here is what they would be told, “Historically, it takes an average of 10 years for a developed economy to return to 2% inflation once the 5% threshold is breached.”

When the Fed embarks on a policy of pushing interest rates higher to fight inflation, I turn ice-cold bearish most markets. The reason is simple. Higher rates are bearish for most markets with the possible exception of the U.S. dollar that tends to move north when interest rates head north.

Plus, and more important yet, is the fact the Fed usually gets what it wants. And that is why the old saw, “Don’t fight the Fed,” came to be.

Generally, I never fight the Fed. And in those rare times I do fight the Fed I find myself usually whistling in the dark because I know better.

It does seem as if the U.S. economy will slow enough to slip the country into at least a mild recession, not a hard one.

Still, a recession smacks of slow economic growth amid lower prices as the Fed keeps hiking rates higher and higher.

Already, most are guessing the Fed will hike rates 0.75% in December with another 0.5% to 0.25% hike in January. Further hikes come down to the level of inflation in early 2023.

I am guessing the economic scenario staring at investors, traders and producers of agricultural products in the years ahead will be one of slow economic growth, rising unemployment and historically high prices. Such a scenario is called “stagflation.”

The last bout of stagflation lasted through all the ‘70s and into the early ‘80s before it ended. It was a very challenging economic environment for investors, farmers and ranchers.

This week, St. Louis Fed President James Bullard stated, “Rate hikes have had ‘only limited effects’ on inflation so far.”

He went on, “The policy rate is not yet in a zone that may be considered sufficiently restrictive.”

I was not surprised by those statements from Bullard. But this statement was a shock to me.

Bullard stated, “The proper zone for the Fed funds rate could be in the 5% to 7% range, higher than current market pricing and unofficial Fed forecasts indicate.”

His justification for such a rate forecast was based on the so-called Taylor rule for monetary policy.

I cannot find anyone that believes the Fed funds rates will be as high as 5% to 7%. Most are pegging the high with interest rates to be around the 3.5% to 4 % range.

If Bullard is spot on with his interest rate forecast, a lot of whistling in the dark is going to take place.