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Inflation Update

Inflation Update

August 11, 2022

Big news: Consumer Price Index (CPI) “inflation” is 8.5% not 9+%. I am preaching to the choir that this 1980s style of inflation hurts. We started warning about this type of inflation in early 2020.

The energy price drop has helped reduce inflation, but for how long will the loan of Strategic Reserves last?  The U.S. Department of Energy (DOE) data showed that the Strategic Petroleum Reserve of the US, which is the stockpile of crude oil maintained by the government intended for emergency use only, has dipped to its lowest levels since 1985 (remember Arab Oil Embargo). This is just one of the challenges affecting inflation along with inflation from wages, food, and rents. 

Overall, commodity prices are rising at the fastest clip since the1970s in the upstream PPI pipeline, the inflationary tide may have receded by a very small amount (see purple line in Chart #3 CPI); however, year over year average weekly earnings of private employees is nowhere near keeping up with inflation (Chart #4 FRED).

President Biden Announces Release from the Strategic Petroleum Reserve

U.S. Clears Second-Largest Ever Loan of Oil From Strategic Reserve

Petroleum and Other Liquids

The challenge going forward is there is little to no oil and gas development in the US, and energy alternatives will not be effective for years.

Natural Gas

Now that the US rig count is down and we have the lowest Strategic Reserves since 1985, where do we go from here?  Overall, the United States imports more than it exports, making it a net importer of petroleum holding steady at 200,000 to 300,000 barrels. We receive imports from the countries listed below.  Note: the U.S. is not on great terms with some of these countries.

Top 10 Countries from Which the U.S. Imports Oil (in barrels per day Dec. 2021):

  1. Canada — 4,783,000
  2. Mexico — 645,000
  3. Saudi Arabia — 550,000
  4. Russia — 405,000
  5. Colombia — 228,000
  6. Iraq — 223,000
  7. Ecuador — 219,000
  8. United Kingdom — 126,000
  9. Nigeria — 110,000
  10. South Korea — 102,000

My concern is this respite we have had in energy prices, which has helped the new inflation data, may be short lived going into winter. I do expect inflation to moderate but nonetheless running well over 5+%, which is still above the 2% FED target. In my opinion this is still not transitory but embedded inflation which is not healthy with a US Gross Domestic Product (GDP) of 2% or lower. Hopefully the U.S. dollar holds in value because that is another component that has helped keep the U.S. inflation rate significantly lower than the rest of the world. How the Federal Reserve handles these inflationary events will affect your portfolio

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Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. Past performance is not a guarantee of future results.