Impending Super Cycle Commodity Signal Argues Against Transitory Inflation

Aging demographics, technological innovation and an ever -expanding debt overhang are three reasons why inflation has been largely kept under wraps in the last three decades. They are still relevant, so why not extrapolate a benign inflation trend into the future?

One reason might lie in the Fed’s extraordinary monetary easing, a by-product of which has been zero money market rates. Another might be record deficit spending as far as the eye can see. It just may be that this unprecedented stimulation will be sufficient to tip the long-term balance to a more inflationary one. Unfortunately, we are in uncharted waters on many fronts, so no one can really answer that inflation/deflation question with any degree of certainty. We can however, look to the technical condition of commodity markets for guidance, since they have usually, acted as a barometer for more generalized swings in inflationary and deflationary pressures.

Inflation is cumulative in the sense that the CPI almost invariably rises, only temporarily dropping during the odd recession. In that sense it’s never transitory. Our definition of sustainable as opposed to transitory inflation is an extended trend of annualized CPI growth, such as took place in the 1966-1970 period (see Chart 2).