Inflationary Signals Abound;Gold & Oil Prices Strengthen While Dollar Weakens

There's little to suggest that current inflation is a problem for the U.S. economy as consumer & producer prices remain weak. Nevertheless, market signals suggest a future problem may be developing. Higher gold prices are one of the more visible indicators of pending inflationary power with its rise yesterday to an all-time high of $1,107 per ounce. That strength has been accompanied by a drop in the trade-weighted value of the U.S. dollar to its lowest level since the summer of last year.

U.S. monetary & fiscal stimulus has done much to generate this inflationary scenario. Low interest rates and the propping up of the banking system have combined to generate an excessive 60% y/y rise in the monetary base and 12% y/y growth in the money supply (M1). Fiscal stimulus is more-than-evident in the budget deficit which ballooned last year to $680 billion and is projected by OMB to be around $1 trillion for the next ten years. Of course, monetization of this deficit is the worry.

The end of the U.S. recession and of the recessions abroad have given rise to energy prices which potentially could fuel higher inflation. Though they are down slightly from the early-October high, crude oil prices at an average $79.43 per barrel yesterday were up sharply from the December low of $32.37. For all of last week the spot market price for light sweet crude oil averaged $79.04 per barrel.

Consumers have seen this pricing strength, and worries abound. The pump price for regular gasoline slipped last week to $2.67 per gallon which was slightly below the June high. However, prices remain up from the December low of $1.61 and this week the wholesale gasoline price remained firm at $1.97. Though gas prices were down slightly from the October high of $2.10, worries abound about the future for pricing power. The expected rate of inflation for the next year has risen to 3.2%, roughly double the December low according to the University of Michigan's survey. Finally, higher gasoline prices have prompted a cutback in driving. Following earlier strength, the demand for motor gasoline fell slightly last week from one year earlier. The energy price figures are reported by the U.S. Department of Energy and can be found in Haver's WEEKLY & DAILY databases. The gasoline demand figures are in OILWKLY.

Natural gas prices also have strengthened ahead of the winter heating season. They slipped last week to an average of $4.27 per mmbtu (-36.6% y/y). Though they remained down by two-thirds from the high of $13.19/mmbtu reached in early-July of last year, they are more than double the low reached early last month.  A bit of good news for the pricing outlook occurred yesterday. Prices natural gas slipped further to $3.87/mmbtu.