Commodity Weakness Destroys the Inflationists’ Narrative

Commodity Weakness Destroys the Inflationists’ Narrative
Canola has become one of the world's most important oilseed crops and the most profitable commodity for Canadian farmers. (The Canadian Press/Jeff McIntosh)
Daniel Lacalle
Most politicians have used the “Ukraine invasion card” to justify the massive inflationary burst in 2021–23. It does not matter if inflation was already elevated prior to the war. Supply-chain disruptions, demand recovery, wage growth... Many excuses were used to justify inflation, except the only one that can make aggregate prices rise in unison, which is the creation of more units of currency well above demand.
Inflationists will blame inflation on anything and everything except the only thing that makes all prices, which are measured in monetary units, rise at the same: money supply growth rising faster than real economic output.
Supply-chain disruption and commodity inflation are caused by monetary expansion—that is, more units of currency going to relatively scarce assets. Profits, wages, or commodities are not causes of inflation but consequences. The unit used to measure prices is weakened by massive increase of its supply. It is as if I sell apples measured in glasses of milk, and suddenly the issuer of milk puts hundreds of gallons more in the market. My apples will cost more glasses of milk to adjust to the reality of the new unit of measure.
Long-term inflation expectations have risen to 3 percent, the highest level in 12 years. Furthermore, according to the Bureau of Labor Statistics, in April the Consumer Price Index (CPI) increased 0.4 percent, seasonally adjusted (SA), and rose 4.9 percent over the past 12 months, not seasonally adjusted (NSA). The index for all items less food and energy increased 0.4 percent in April (SA), up 5.5 percent over the year (NSA). However, commodities have plummeted in the past year.
Crude oil (WTI) is down 38 percent in the past year, trading below the pre-Ukraine invasion level. Gasoil (-44 percent), gasoline (-40 percent), heating oil (-44 percent), natural gas (Henry Hub -74 percent and NBP-65 percent) have all plummeted to prewar levels. Even wheat is down 30 percent from a year before June 4, 2023. The FAO Food Price Index has also corrected to a two-year low in May. 
Why do commodities plummet in the middle of the China recovery and elevated demand growth and tight supply? Monetary factors again. The massive rate hikes and the subsequent monetary contraction have impacted the internationally quoted prices of goods all over the world. It is more expensive to purchase storage, finance margin calls, hire tankers, and start long positions.
If commodities and the Ukraine war were to blame for inflation, why is the CPI remain so elevated? Money-supply growth is plummeting, but not enough to revert the price expansion of 2020–23 and, in fact, global money supply has not fallen lower than $101 trillion, according to Bloomberg. That is a significant drop in money supply from its highs, and one that justifies the rapid decline in headline inflation, but not enough to revert the price increases for consumers.
Central banks engineered the massive inflationary burst, as proven in the BIS study by Claudio Borio et al., and now find that it is relatively easy to reduce annualized inflation to 4–5 percent, but not that simple to bring it to 2 percent.
What no central bank wants to tell you is that the only way in which inflation will be brought down significantly is a recession. That is why they talk of a “soft landing” that is impossible if they truly wanted inflation to fall permanently.
What no central bank also wants to tell you is that the entire burden of monetary policy normalization is going to fall on families and the private sector, because governments continue to spend as if nothing mattered.
What nobody wants to say is that if central banks go back to easing in the second half of 2023, inflationary pressures, and the subsequent impoverishment of all citizens, will persist.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of the bestselling books “Freedom or Equality” (2020), “Escape from the Central Bank Trap” (2017), “The Energy World Is Flat”​ (2015), and “Life in the Financial Markets.”
Related Topics