Adios Inflation

Here a quick and oversimplified primer on inflation and financial markets, with notes on this cycle.

1. Inflation is a rise in money and credit. The biggest force for inflation this cycle was...federal deficit spending and stimulus. Mostly over. "Real" money supply is falling. "True" money supply is falling.

2. Rising commodity prices are not inflation. They can be inflation, and they can help create inflation if the central bank or government "finance" the increase instead of accepting slower growth. That was the Fed in the 1970s. That was the Fed until May 2022.

3. Markets don't care about the CPI, they care about first and second derivatives. When the inflation starts starts turning, markets reprice. Understand that gasoline quickly dropping to $3.50 per gallon is still relatively high for U.S. consumers, but that it represents a deflationary bomb in the financial markets.

4. Consumer prices can keep rising. When I say disinflation/deflation is starting, I always get pushback of "have you been to the supermarket lately?" Don't trade on this information. Consumer prices probably won't drop much. If they drop, it could take months. Gasoline is a prominent exception.

5. The yield curve is inverting. The market is starting to price in rate cuts.

On to the charts...


Natural gas


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