Biggest inflation threat in 40 years looms over markets

William Watts with MarketWatch sees the “biggest Inflation scare in 40 years” on its way. He expects massive amounts of stimulus coupled with a boom associated with easing COVID restrictions to generate a surge in prices like the nation hasn’t seen since the late 1970s to early 1980s.

The signs say Watts may be right. Commodities, with the exception of closely managed gold and silver prices, have been screaming higher in recent months. Wheat, corn, lumber, copper, steel, and a host of other key inputs have all spiked higher.

The jump is already being felt in consumer goods and construction, but the bulk of the price hikes may still lie ahead.

Watts’ theory about an imminent move higher in prices looks sound, but his suggestion the surge could be based primarily upon a “data quirk” is nonsense.

Today’s prices are compared to those of a year ago. He suggests inflation would look tamer if prices were compared to pre-pandemic levels.

Watts says prices fell during the pandemic. While futures markets crashed during a brief bout of panic selling, they rebounded quickly.

It’s a mystery how Watts could be finding significant consumer price deflation in the data. There hasn’t been any pullback in the CPI.

Prices continued to rise throughout the past 12 months, even looking at the oft-understated Bureau of Labor Statistics inflation data.

In reality, investors should be positioning themselves for a dramatic and sustained acceleration in price inflation. New record highs in multiple components cannot be written off as a temporary quirk in the data.

Fundamentally, there has perhaps never been such a concerted effort at weakening the dollar. Politicians have begun dropping cash on Americans from helicopters.

The Fed reduced the funds rate to zero more than a year ago. It looks to be only a matter of time before the central bank ratchets up bond purchases and debt monetization.

Somebody has to buy the trillions of dollars in debt being issued to finance record federal deficits. Our wager is on Jerome Powell and the FOMC.

Many expected massive price inflation before now, given the extraordinary easy-money policy in recent decades. But, regardless of the timing, the table has been set.

What lies ahead could make the price inflation of the late 1970s and early 80s look tame.