The Keystone Speculator's Inflation-Deflation Indicator Signals a 3-Month Lull in the Runaway Inflation

by K E Stone (Keystone)

Over one year has passed since the last update of The Keystone Speculator's Inflation-Deflation Indicator. The indicator explains the current inflation debate with a single chart. 

The Keystone Speculator's Inflation-Deflation Indicator catapults higher to the peaks in inflationary activity in May and June 2022. In September 2022, the upside in the commodities sector and the 10-year yield moderating provide a respite from the record-setting rise in inflation off the pandemic bottom.

The Keystone Speculator's Inflation-Deflation Indicator sits at 2.95 on the border of neutral and inflation. The deflationary abyss from 2015 to 2020 is over. President Biden and Congress pass massive COVID-19 spending bills in 2021 throwing money out to Americans like a fireman tossing candy to children during a parade.

At the same time, in 2020 and 2021 the Federal Reserve turned up the money-printing dial from from heinous to disgraceful. The money-printing was so obscene it would make Caligula blush. The Fed turns the money-printing dial to 11 a la Spinal Tap. Chairman Powell and Treasury Secretary Yellen toss money to Americans from a helicopter piloted by former Fed Chairman Bernanke.

Worse, creating the trifecta of the inflationary backdrop, is Biden's stupid misguided climate change agenda hacking the vital oil, gas and coal industries to death while promoting windmills, solar cells and glorified golf carts (EV's) that do not work in natural disasters and cause the same if not more ecological waste (mining and disposal).

The factors above are the inflation fuel and the pent-up demand for goods and services after the lows of the pandemic lights the fuse.

The oil, coal and natural gas industries are the energy backbone of the United States. It takes a high degree of stupid to purposely crash these industries, adding to the already out of control inflation due to the Biden/Congress spending spree and the Fed's money-printing, when the so-called green energies are not ready for primetime. At the same time, Russia's dirtbag dictator Putin wages war against Ukraine sending energy prices to the moon exacerbating worldwide inflation.

Americans have become compromised slaves cheering the daily bullet points of one or the other corrupt political tribe's talking points, pledging allegiance to their tribe instead of doing what is good for the country as a whole. Such is the crony capitalism system in its last throes.

The Keystone Speculator's Inflation-Deflation Indicator crashes down to 1.04 in April 2020, and then catapults higher to the peak at 3.39 on 5/3/22, in the inflation camp, and now relaxes lower to 2.95 to catch its breath.

The 10-year Treasury note 'price' is used for the denominator (bottom number) of The Keystone Speculator Inflation-Deflation Indicator. The 10-year Treasury price is 96.28 with a yield at 3.19%.

Commodities are in the numerator (top number). The CRB Commodity Index had collapsed in recent years to the low in April 2020 and has taken off higher ever since now at 284.47 off its peak in June. Calculating Keystone's Inflation-Deflation Indicator;

The Keystone Speculator Inflation-Deflation Indicator

CRB/10-Year Price = 284.47/96.28 = 2.95

Above 4.20 = Hyperinflation

Between 3.1 and 4.2 = Inflation

Between 2.5 and 3.1 = Neutral; Inflationists and Deflationists Battle

Between 2.1 and 2.5 = Disinflation

Below 2.1 = Deflation

Granted, the calculation above is focused on goods inflation rather than services inflation. For many decades, you could track commodities, with the CRB, or GTX, and the goods inflation and deflation dictated the overall economy's direction. As the US politicians screwed America over the last five decades, sending jobs overseas and destroying the middle class so stock prices could move higher on the slave labor, the goods production went to foreign nations while the US focused more on services as the major part of the economy.

The debate between inflationists and deflationists over the last few years has been the discussion of goods versus services inflation. The pundits looking for inflation said goods would inflate and catch-up to the rising services sector while the talking heads preaching deflation said the services inflation would drop to join the goods disinflation and deflation as the economy slumps. All bets were off and both sides ended up being correct as the COVID-19 pandemic hit knocking the world on its arse.

The deflationists were correct in 2019 and 2020. Services inflation drops to become more compatible with the goods deflation. Of course, the China Virus pandemic wiped out the airlines, hotels, travel, restaurants and hospitality and leisure industries. Services are knee-capped falling to the ground joining the goods deflation. Men turned into bush people letting their hair grow wildly outward as they avoided the barber for fear of covid.

Then the central banker cavalry arrives March 2020 promising to print money forever. Greenspan, Bernanke and Yellen (former Fed chairs) were already in the basement of the Eccles Building running the printing presses like mad. Helicopter Ben loaded-up his chopper with freshly printed Benjamin's dropping the money from the sky into the investment banker's hands on Wall Street.

President Biden provides way too much stimulus creating a lazy workforce that would rather sit home than work. The staffing shortages are a headache for employers that want to get back to normal but cannot since there are not enough works to fill positions. Wages rise sending inflation higher. These behaviors and the obscene amounts of Congressional (fiscal) and Federal Reserve (monetary) stimulus sends inflation to the moon.

People are using the easy money to scoop-up stocks, bonds, real estate, paintings, collectables, antique cars, art and anything else that has a heartbeat and is worth five bucks. The easy money from the Fed since March 2009 encourages reckless spending and then when rates pop, and folks have little saved, and then lose their jobs in a recession, it is light's out. The Party is Over as Willie sings.

When the Fed and Congress tag-teamed in March and April 2020 with trillions in stimulus, billions went into the US stock market pumping it to record highs. A few hundred thousand workers left the workforce either retiring or caring for loved ones after the pandemic, creating a massive labor shortage as the pent-up demand hit in 2021 and 2022.

Rising wages create inflation. The lack of inflation and ongoing persistent deflation for many years was due to the stagnant wage growth. Inflation cannot exist without wage inflation which had not occurred for many years until 2021 and 2022.

Interestingly, as economic activity slows in the US, and some companies begin layoffs  in August and September 2022, the wages are starting to stagnate again, helping create the current top in inflation since May.

The inflation this year is mainly due to energy and food costs. People notice higher gasoline and food prices more than other price changes. The inflation is moderating since May/June as oil and commodity prices come back down to earth. If Americans are this worked-up about inflation at such an early stage of the inflation game, good luck. You ain't seen nuttin' yet.

Inflation will eventually run far higher in the 2023 to 2025 time frame and become more universal throughout the goods and services sectors. Then comes the real fun; hyperinflation.

Just think, in a few years, the chart above will be way up there in the hyperinflation zone. That is when the Dow will be over 50K, the SPX will be 10K or more, a gallon of gasoline will be $10 and more, a loaf of bread will be $10. The stock market will be hugely higher, however, the US dollar will be toilet paper. That will be a whole new set of challenges when the velocity of money (money on reserve at the banks that suddenly floods into circulation) kicks in.

Inflation has not been this high since the springtime 2011. Back then, traders were convinced that rates would continue higher but instead the peak was in. Time will tell if the inflation peak in May/June 2022 will hold (for a few months), or not.