Is it really justified to attribute a looming rise in inflation to energy costs?

Outlook:  We get the Conference Board consumer confidence today as well as house prices. As in Germany’s GfK, US consumer confidence probably rose. We also get merchandise trade numbers, which nobody follows anymore but as Gittler at BDSwiss points out, this is where we see port congestion and supply constraints.

The best bit of data today may not be national economic stuff but rather OPEC’s latest World Oil Outlook. WTI went above $76 so far today and Brent went over $80 for the first time since 2018. Natural gas is up 25% in just the last week. This means a rise in inflation and inflation expectations, and therefore also rise in the yield investors demand. Note that as of last week, the Atlanta Fed business inflation expectations came in at only 3.1%, so the latest information has not yet hit indicators like this.

We would really like to know how much consumer inflation comes from the rise in gasoline and heating oil, and what percentage of total costs energy represents to factories. Why do we not know an important number like this? For the average US family, electric/gas/water/sewer costs are probably a good 10-15% of net income, if not more. It may be that perception of rising costs, most obvious at the gas pump, have more effect than the true budget effect, and this is what worries central bankers as much as anything else (and rightly). The talk of panic in the UK and factories shutting down in China don’t help—but is it really justified to attribute a looming rise in inflation to energy costs?

Newspapers sell on shocking headlines, so we feel skeptical—and we are an inflation hawk. Critics say the last time to raise rates or remove support is when the recovery is not yet really established, but central bank persistence in tapering is really a vote of confidence that the recovery is real and to hell with scare stories about inflation. Hilariously, a hint yesterday that the BoE is not afraid to tackle inflation with everything it’s got had only the briefest of effects.

In the end, those rising yields are dollar supportive unless they get scary and also drive equities down too much into correction territory. We guess that’s not in the cards this time.

Tidbit: Remember that electric pickup truck from Ford—the best-selling vehicle in the US for four decades? Orders are swamping the company, so Ford is going to invest over $11 billion (and create over 11,000 jobs) for a new factory and two battery factories. Terrific advertising hook: “It can power your house for days.” That ought to go down well in hurricane and tornado country. It’s also offering up an electric ATV. We have so little good news that this good one stands out.

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