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The Next Inflationary Surge is the Big One

Throughout the United States history of inflation and deflation, one thing is certain:

The Federal Reserve and political elites will make it worse in either direction.

This time is no different.

Despite the belief that Modern Monetary Theory has usurped the business cycle and that the conditions will never allow for rapid inflationary surges within economic expansions and contractions, thus far the MMT circus is batting zero point zero.

The reality is that commodity prices are pressuring the monetary authorities out of left field in their eyes, forcing the Fed to persist with the mantra and threat of “higher for longer” instead of ending the discussion last summer with hard rate increases to kill any threat of inflationary urges and begin a gradual slowdown of economic activity.

The worst part is the new “Operation Twist” where instead of laundering MBS and Agency paper, the US monetary authorities are using propaganda to demonstrate how inflation really isn’t that bad and the people who are complaining need to grow up and face the new economic model.

Ugh. But the Wall Street Journal says hold on:

The reality though can be told through one chart which indicates why the inflation situation is only going to get worse, the ever reliable Thompson/Reuters CRB Index:

With prices still below the 2021 post-pandemic levels this is hardly an indication that inflation have topped, inflation is still capable of surging much higher. With commodities like cocoa skyrocketing to stratospheric levels and the consumer market has yet to digest just that one aspect of soft commodities experiencing shortages.

While everyone may not consume or need cocoa or chocolate every day, the metals are warning of an increased price for everything from electronics, to autos, and worse new homes as copper is perking up again towards new all time highs.

This rise however is not the peak, if the economic theories I subscribe to are correct. As demonstrated by the political class the idea of accepting hard times to cure the inflationary ills and spending propensities of our government during an election year are all but impossible.

This is why this author consistently warns that the economic system along with the global order reeks of a 1979-1980 era of instability.

If this is correct and the past two inflation reports are simply feints, then the real pain is dead ahead.

Would I expect to see 14% CPI-U? Not realistically, but north of 10% easily, even during an election year. The smallest whiff of recession by the Fed will result in a panic move in interest rates and expansion of credit. The truth is that some good old fashioned deflation is what it will take to correct the excesses but due to political considerations, no one is responsible enough to endorse such a course of action.

Enjoy your $5 Hershey Bars and $1.50 Dollar Tree America, you’ve earned it.

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