7% dollar inflation

February 14th, 2021
1 minute read

Bonds & oil

• Of the three major market indicators, the Dow, oil price & US 10 year bond yields, which one is going up the most, recently?
• It’s not the stock market. The last three months, the Dow has gone from 30,000 to 31,400 or +4.6%.
• Bond yields have increased from 0.9% to 1.2% & oil from USD41 to USD60, +33% & +46%...

Commentators notice

• A lot of analysts have started to pay attention to this & are talking about higher inflation & higher bond yields.
• Back in early December when yields were 0.9%, we wrote that rising commodity prices especially palm oil could ‘break the bond market’.
• Now it’s happening, but I think the market is still underestimating just how high inflation could go...

1970s inflation

• I was born in 1967 & the 1970s was a period of famously high inflation. Here’s how that played out.
• In 1967, US CPI was growing 3% up from 1.6% in 1966. It slowed briefly in 1968 before rising to 5.8% in 1970. Inflation slowed again to 3% by 1972.
• But just 2 years later in 1974, inflation was 11.1%!

Now inflation

• How about now? In 2013, US inflation was almost the same as 1966, 1.5%. Inflation then dipped towards zero before recovering to 2.4% in 2018.
• Since then inflation has fallen back quickly, down to 1.4% in 2020. Declining oil prices was one reason why.
• This pattern while at a lower level, almost perfectly matches the build up in the 1970s.

7% inflation!

• If we project the pattern forwards... by 2022, US inflation will be heading towards... 7%, much higher than markets currently expect!
• Remember while the 1970s was high inflation & associated troubles in the west, it was also a boom time for Indonesia, especially for the oil industry & other commodities.
• Our economic growth accelerated & that can now happen again....