Inflation - There's None (Apparently)

2021 news Feb 11, 2021

Published by Anthony Di Pizio

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So Many Questions

Yesterday, the US Bureau of Labor Statistics (BLS) released its monthly Consumer Price Index (CPI) inflation data, which showed a 1.4% year-over-year rise in prices. This was slightly weaker than the 1.5% expected, signaling that inflation still remains muted. 

Though, if you watch financial news or monitor finance chatter on various social networks, you will see mounting questions about this data in contrast to the recent face-ripping rallies in various commodity prices. Lumber, for example, has been a hot topic as futures prices reach an all-time high of $950 - about 100% higher than the February 2020 pre-pandemic peak. 

How does a rise in lumber futures translate to the real world? Well, it is estimated that the run has added $16,000 in additional build cost to a traditional single family home (CNBC). It's statistics like these that make investors wonder if the CPI data is really a useful metric. 

Why the (potential) disparity?

There are a couple of obvious reasons. We won't get too bogged down in them but one relates to a time lag between inflation appearing and then showing up in the data. 

The below excerpt from the BLS website states the lag can be as wide as 2 years from their expenditure survey and then its subsequent use in the CPI data. This doesn't encompass the entirety of the data used but it's an important factor. 

Further lag can sometimes be created through the supply chain. Producers will often lock in prices months in advance to smooth out short term volatility, so it can take some time for inflation to actually reach the final consumer product.

In addition, technology has had a huge impact on consumer goods. Companies like Amazon have made it cheaper and more convenient for customers to shop online, allowing them to create enormous scale and therefore run on smaller margins, leading to cheaper prices. 

Major Moves

The purpose of this article is to put the data aside for a minute and look at what's really happening in raw materials and commodities. Even if these developments don't flow through to consumer prices in the short term, it's easy to see a scenario where central banks are faced with a serious inflation problem perhaps 12 months down the road. As investors, it's our job to get in front of these trends so we need to be paying attention right now.

Lumber - All Time Highs

Iron Ore - 10 Year Highs

Copper - 9 Year Highs

Corn - 8 Year Highs

Soybeans - 8 Year Highs

...The list really does go on with further, but more moderate rallies over the last 6 months in wheat and even coffee. 

Some of these trends will form the basis of our stock selection going forward, but if these price rises persist in their pace then the overall market may be forced to account for contracting monetary policy much sooner than expected. 

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