Another Inflation Spike Is Coming — And This Time The Fed Can’t Save You

The financial system is screaming that another round of inflation is coming.

To be clear, the U.S. was risking another round of inflation before the War in Iran began. Now that the War has resulted in a spike in energy prices/ supply chain disruptions, another inflationary storm is rapidly approaching.

Some key items of note:

1) The Fed’s preferred inflation measure is the Core-Personal Consumption Expenditures (Core PCE). Core PCE has 178 components within it. Some 54% of these components are clocking in at over 3% up from 45% this time last year.

2) Oil prices have been over $90 per barrel for two months now. This will have a ripple effect in that:

• Energy prices were the only component of the inflation data that were negative. Everything else was still rising in price, albeit at a slower pace (which is why Year over Year inflation data was falling).

• Energy prices are an input for every other industry. There is a lag time of six to eight weeks before this really impacts things. So, the secondary and tertiary effects of higher energy prices have yet to be fully felt in the economy.

3) Bonds are finally beginning to react to this situation.

• The yield on the 2-Year U.S. Treasury is at 4.1%. With the Fed Funds Rate at 3.5% this means the market is forecasting two rate HIKES in the next 24 months.

• The yield on the 30-Year U.S. Treasury has broken above 5% and is now trading at the Biden inflation highs of 2023.

The Fed has rates at 3.5%.  In early February, the yield on the 1-year U.S. Treasury was 3.35%, suggesting another rate cut was coming. Today that same bond is yielding 3.85%, suggesting the Fed won’t be able to cut rates at all but will be forced to HIKE them at least once in the next 12 months.

All of this is happening at a time when the $USD is on a 15-year trendline. When this line goes, things storm will hit.