Inflation Is Poised To Soar, 3% By June Is "Almost Certain"

I agree with his opinion on speculative bubbles, but a VIX over 100 might be overdoing it.

And if stocks crash, so will consumer spending and US treasury yields. Inflation will be the last thing on the Fed's mind, except how to get it. 

3% to 4% CPI Inflation By June?!

Gundlach is referring to year-over-year impacts, not a sudden spike of 3% in one month.

Easy Comparisons

It's not that inflation will be rampant. 

Rather, it's the impact of year-over-year comparisons, goosed by a huge Covid-related dip in energy prices in April and May of 2020.

CPI Select Indexes Not Seasonally Adjusted 

CPI Select Indexes Not Seasonally Adjusted 2021-02

The huge dip in energy prices in April and May of last year only made a tiny dip in the CPI that month as shown on the chart. 

This happens because motor fuel only accounts for 2.88% of the index. The broader "Energy Index" is only 6.155% of the CPI. 

It takes a huge swing in smaller components to impact the current CPI much, but the year-over-year impact is another story.

Year-Over-Year CPI and Projections

CPI and Progected CPI Year-Over-Year

Shelter is stabilizing factor that comprises a whopping 33.316% of the CPI. 

Incremental increases in most of the CPI components plus a big increase in energy will lead to something like 3.4% year-over-year inflation in May by my calculations.

Whether these year-over-year comparisons will “really spook the bond market” as Gundlach suggests remains to be seen.

And if energy prices decline from here, in May of 2022 we will have year-over-year comparisons that will look more benign than they are. 

This is one of the problems with year-over-year comparisons when there is an unusual spike or dip.

Expect the Word Transitory

If these spike projections are accurate, expect Powell and other members of the Fed to be howling the word transitory for weeks on end. 

ISM Angle

This statement by Gundlach caught my eye.

Headline CPI could even go above 4% based on ISM data, which could trigger a bond selloff.

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