Inflation Sprouts Anew

Sometimes you have to stand back and look at the bigger picture. Here’s what the ups and downs of consumer prices look like on a rolling 12-month basis:

Inflation CPI Change Per Year

In other words, annualized gains in consumer prices — having crashed to below 1% in the wake of the housing bust, financial crisis and bailout of the nation’s megabanks — are getting closer to the 2% to 3% levels of precrisis years.

Another lesser-known, but closely watched piece of inflation data is the personal consumption expenditures price index, or PCE for short. That, too, is ticking higher in a meaningful way, hitting nearly 1.7% — its highest level since early 2013.

So, is that all we should expect from inflation — a move back toward what’s considered “normal”? Or is this the start of a bigger, more dangerous inflationary trend?

Hear No Inflation, See No Inflation

Wall Street’s view is basically, “What’s good enough for Janet Yellen is good enough for us.” And with the Fed chair, in her recent speeches, expressing confidence in more benign inflation, it’s no wonder that the major stock indexes are still heading toward new record highs.

Others aren’t so sanguine. Blackrock’s main strategist, Richard Turnill, put it succinctly last month: “Stabilizing oil prices and a tighter labor market could contribute to rising actual, and expected, U.S. inflation.”

The folks over at the Pimco, who worry about lots of bond mutual fund portfolios, are likewise ringing a warning bell. Their main economic advisers are telling everyone who will listen that the bond market is being lulled to sleep by inflation expectations that are way too low.

Additionally, the head of interest-rate strategy at Wells Fargo’s brokerage arm told Bloomberg recently that the Fed “is running the risk of getting more than they asked for. They are overconfident in thinking they can rein in inflation.”

How do you protect yourself from the Fed’s “we have it all under control” hubris? As The Sovereign Society has long warned, gold’s huge price spike since the start of the year ought to tell you something. It’s a big, red “no confidence” signal in the Fed.

Clearly, bond investors could care less at the moment. The 10-year Treasury note’s yield is just shy of 1.8% today, and it’s not hard to see why buyers would pay so much to receive so little in return. Fear of deflation and flight to safety have been the chief concerns for close to a decade. Old thought patterns are hard habits to break.

On the one hand, if markets are supposed to “discount the unknown,” as economists tell us, then it’s hard to see how much more “worry” the bond market can really price in when it comes deflationary fears.