Inflation Rocks, but Where and Why?

“Shock and horror” this week as UK CPI inflation breeched the Bank of England’s target rate of 2% pa, a target that the bank has hardly ever met over the past couple of decades, whilst across “the pond” the financial media talking heads are seeing the current 2.7% annualised rate for US CPI as a major reason for the FOMC’s “guidance” towards three rate increases this year.

It all sounds so logical doesn’t it? The Bank of England blames the Brexit effect on the £Sterling and the price of Oil, which of course is dollar-priced, whist Auntie Janet at the Fed deludes herself and anyone else who cares to listen that it’s down to a strengthening US economy, despite the fact that US GDP has been trending lower for over two-years now, despite the efforts of the Fed to inflate it.

The first of two charts shows UK CPI inflation annualised since 2001, with the Oil price overlaid in red and the £/$US exchange rate as the black dashed-line. The £/$ rate has been used as the Sterling index on the Bloomberg system has a relatively short history and either way it is closely correlated with the £/$ rate:

Whilst the Oil price did have a decent correlation with UK CPI until 2012, it’s broken down since then so sorry Mr Carney but that excuse doesn’t stack up now. As for the weaker £Sterling, the history shows the “opposite,” strong £ = higher CPI or vice-versa, until the current nil-correlation that is!

 The second chart, just for a bit of fun, compares 110-years of US CPI inflation, as a percentage return, against the Dow Jones Industrial Average, or Dow, the most watched stock-index in the world:

It was intended to show a 100-year chart but that would have omitted most of World-War 1 and as you can see, wars are inflationary. But again either way, drum roll:

110-year return for US CPI = 168% V 110-year return for the Dow = 25,735%

Wow! Who would have thought it, but there it is. However, they say that context is everything and that’s the great thing with long-term charts.

Kindly note that the Dow effectively flat-lined, until the 1970s that is, a fact that this commentator has barked on about on numerous occasions and will again next week when the subject is revisited.

In the meantime, there appears to be an element of surprise in respect of yesterday’s market swoon. As such you may wish to read or re-read our “Yen, A Desire to Watch Closely,” article of late February, which explained the importance of watching the $US/¥ cross-rate and its implication for various asst classes whilst “Countdown to the showdown” of early March discussed the post Trump election rally for differing assets before warning of an approaching period of important dates, including the 21^st March.

So there we have it, the warnings have been there to see…and FREE of charge come to that, for those who aren’t bewitched with the media talking-heads or the “smoke and mirrors” from the central banks.

Oh, you may also wish to take a look at last year’s “The Madness of Crowds” knowledge share, which would have removed any surprise from the impending bond yield surge.