The Fed’s #1 Predictor Of Inflation Is Flashing Red Alert

Last week I noted that the bond market was SCREAMING inflation was coming.

By quick way of review:

The yield on the 2-Year U.S. Treasury which the Fed usually follows, is predicting no more rate cuts from the Fed, but rather two rate HIKES within the next 24 months.
Yields on government bonds globally are soaring whether they be in the United Kingdom, Germany, or Japan.

Today I want to share a more worrisome item… namely, the spike in agricultural commodities. As I write this, the Invesco DB Agriculture Fund (DBA) has just broken out of a triangle formation to the upside. This is an extremely bullish development.

Why does this matter?

Because the Fed’s own research indicates that food inflation is the single best predictor of future inflation… even better than the more famous inflation measures (the Consumer Price Index, CPI and Personal Consumption Expenditures, PCE).

You see, back in 2001, the Fed had several researchers dive into the subject of inflation. Their goal was the analyze whether the Fed’s preferred measures of inflation (CPI and PCE) are decent predictors of future inflation. The Fed also investigated a whole slew of other inflation measures for comparison purposes.

The results?

The Fed found that food inflation, NOT CPI or PCE, was the best predictor of future inflation. Fed researchers wrote the following:

We see that past inflation in food prices has been a better forecaster of future inflation than has the popular core measure [CPI and PCE]…Comparing the past year’s inflation in food prices to the prices of other components that comprise the PCEPI (as in Table 1), we find that the food component still ranks the best among them all… - Source: St Louis Fed (emphasis added).

With this in mind, take a look at the below chart:

As you can see, agricultural commodities are currently trading higher than they were in 2022, during the last round of inflation and are now closing in on their 2011 highs, when parts of the world descended into a food crisis.

This is a major warning to investors. Inflation is returning. Some asset classes will do great in this environment… others will get obliterated.