Let’s discuss a commodity we never discuss on this little blog: oil.
Oil is down 13% since April 12, 2023, and down 43% since the peak in March of last year.
Does the WTI chart look inflationary to you?
After the spike, the price of oil is unchanged since the beginning of 2022. That doesn’t look inflationary to me.
Here’s the thing: while the media focuses on labour costs, it’s oil that drives inflation.
Higher labour costs do not cause inflation. It’s the other way around: as inflation increases, labour costs go up (because workers demand higher wages).
If you want a correlation, look at oil and inflation.
Oil is used in everything, so the price of oil is 85% correlated to the CPI. As oil moves, so does inflation.
If you drill down to the components of the CPI you see similar correlations with goods, shelter, food, air fares, delivery services, and so on.
As I mentioned last week, there is always a time lag between when something changes and the full effects are felt in the broader economy, but the direction is clear: lower oil prices lead to lower inflation. That’s how it works.
But wait, there’s more! Higher interest rates caused the banking crisis in the USA, and as a result commercial bank credit is shrinking. If you are a regional bank on the verge of going out of business, you aren’t increasing your lending to small and medium-sized businesses.
That’s deflationary.
The forces are aligned: inflation is dropping, rapidly.
The personal savings rate is dropping. Consumer debt is increasing.
The recession is nigh.
I expect the Big Stocks (like Apple) to have one final blow off top, and then the recession and contraction will be here.
Govern yourself accordingly.
See you next week.
Oil
by JDH on June 3, 2023
Let’s discuss a commodity we never discuss on this little blog: oil.
Oil is down 13% since April 12, 2023, and down 43% since the peak in March of last year.
Does the WTI chart look inflationary to you?
After the spike, the price of oil is unchanged since the beginning of 2022. That doesn’t look inflationary to me.
Here’s the thing: while the media focuses on labour costs, it’s oil that drives inflation.
Higher labour costs do not cause inflation. It’s the other way around: as inflation increases, labour costs go up (because workers demand higher wages).
If you want a correlation, look at oil and inflation.
Oil is used in everything, so the price of oil is 85% correlated to the CPI. As oil moves, so does inflation.
If you drill down to the components of the CPI you see similar correlations with goods, shelter, food, air fares, delivery services, and so on.
As I mentioned last week, there is always a time lag between when something changes and the full effects are felt in the broader economy, but the direction is clear: lower oil prices lead to lower inflation. That’s how it works.
But wait, there’s more! Higher interest rates caused the banking crisis in the USA, and as a result commercial bank credit is shrinking. If you are a regional bank on the verge of going out of business, you aren’t increasing your lending to small and medium-sized businesses.
That’s deflationary.
The forces are aligned: inflation is dropping, rapidly.
The personal savings rate is dropping. Consumer debt is increasing.
The recession is nigh.
I expect the Big Stocks (like Apple) to have one final blow off top, and then the recession and contraction will be here.
Govern yourself accordingly.
See you next week.