Inflation Warning

 Inflation has come down fast from its highs… but! It’s all due to sharply lower energy prices - see chart below. If it wasn’t for energy (ie oil prices tumbling) inflation today would be at 5% or higher.

And why did oil prices tumble? Almost entirely because the US drained its Strategic Petroleum Reserve down to levels last seen in 1983-84. Within just a few months the government sold a massive 300 million barrels of crude oil, causing prices to tumble - see chart below.

Sales from the SPR have now stopped and - shock! - crude oil prices are climbing once again, going from $73 to $83 per barrel in the last 30 days. Not surprisingly, gasoline futures are trading at $2.95/gallon, the highest level in 12 months. Even more ominously, 30 year Treasury bond yields are at 4.24% very near the highest level in 20 years.

It doesn’t take a degree in economics to guess where inflation is headed next…or what this means for markets.