If you’ve turned on a television, listened to the radio, or browsed Internet news sites recently, you’ve almost certainly heard of an inflation crisis and panic.
You’ve been told that’s why the Federal Reserve is raising interest rates. It’s the reason the stock market has tanked. It is a political crisis as well as an economic one.
And everywhere you go you hear the usual babble, prattling about soft landings and hard landings, whether the Fed is “overdue” and whether we’re going back to the “stagflation” era of the 1970s.
There is only one problem.
Someone forgot to warn the financial markets.
And I just checked, and while the yaks are prattling about rampant inflation, nine out of 10 inflation barometers in the financial markets are going down.
If inflation expectations spiked, many, most, or even all of them would surely be pointing higher. Instead, the only one in the black for this month is the index of big oil stocks, and even then it’s pretty modest.
The bond market’s own inflation forecast has collapsed. At the end of April, the bond market was forecasting an average inflation rate of 3.3% over the next five years. Today that has dropped to 3.06%.
This is, or should be, very promising news for retirees, who are seeing their fixed or semi-fixed incomes being eroded by recent price increases.
It is, or should be, very promising news for the rest of us as well, to see our 401(k)s turn into 201(ks). If stock markets are crashing because everyone fears rising inflation and rising interest rates, anything that indicates otherwise has to be good news.
Meanwhile, economist Lutz Kilian at the Dallas Fed tells me that the month-over-month effect of oil prices on inflation has already passed its peak (at least for now). Lutz recently co-wrote an article about this.
“We presume a WTI [crude oil] price of $102 in April 2022 (that is already seen in the data) and $110 thereafter until the end of 2023”, Kilian tells me. “This scenario is effectively a flat forecast based on the level of the oil price in early May 2022. We find that the monthly inflation rate associated with the observed and hypothetical shocks to the price of gasoline reaches a maximum of 8, 5 percent (expressed as an annualized rate) in March 2022, but falls to zero in April. It levels off near 2% at annualized rates later in 2022 and slowly declines towards zero in 2023.”
Naturally, he warns that the analyzes should be treated with caution and that further changes in the oil market, for example through an outright European ban on Russian oil and gas, would change the figures.
Crude oil prices have fallen nearly 20% from their peak in early March. Sooner or later this will bring relief to the gasoline pumps.
As for a European embargo on Russian oil and gas? His correspondent, who has been reporting on these things for a quarter of a century, suspects that Russian oil and gas will find its way to the world market regardless.