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Inflationary pressures; is persistent the new transitory?

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The Chairman of the Federal Reserve, Jerome Powell, and the Treasury Secretary of the United States, Janet Yellen, believe that current inflationary pressures are transitory based on pent-up demand, supply chain bottlenecks and labor shortages. Unquestionably we are living in unprecedented times which have forced governments worldwide and central banks globally to aid in the economic recovery from the global recession, which began as a direct result of the pandemic in March 2020.

A combination of government fiscal stimulus and a highly accommodative monetary policy by central banks worldwide has improved the global economy. As many analysts believe, the chance of the global recession becoming a global depression is halted. As the world begins to recover from one of the most difficult global scenarios this century economists worldwide are determining at what cost this recovery has resulted.

The most current numbers from the U.S. Bureau of Labor Statistics indicate that inflationary pressures (CPI-U) as of September are currently at 5.4%, compared to inflationary pressures one year ago. This is an increase of 0.1% over inflationary pressures in August and the highest inflationary pressure since 2009.

Both the Federal Reserve and the U.S. Treasury Department continue to insist that the majority of current inflationary pressures are transitory. This weekend Janet Yellen, Treasury Secretary, tried to reassure investors that the United States will not lose control over the battle to curtail rising inflation. Speaking to CNN, she said that, “I don’t think we’re about to lose control of inflation. On a 12-month basis, the inflation rate will remain high into next year because of what’s already happened. But I expect improvement by the middle to end of next year – second half of next year.”

This is in line with recent statements issued by Chairman Powell. However, the current tone regarding inflationary pressures has indicated enlarged concerns that inflation will be more persistent than originally believed. During the chairman’s keynote speech titled “Monetary Policy in the Time of COVID.” at the annual Jackson Hole Economic Symposium he mentioned “inflation” 89 times. He also suggested five key assumptions to support his view that the current level of inflation will be transitory in nature.

According to an article penned by Jeff Cox of CNBC, indicated that he believes that the” Federal Reserve Chair Powell’s five measuring sticks on inflation aren’t holding up very well.” Furthermore, he indicated that “there are weaknesses in each of the five planks that, if not thwarting it altogether, at least undermine the Fed’s inflation position and give markets and consumers plenty to watch.”

Suppose the recent increase in gold pricing in October are any indication of investor sentiment regarding inflation. In that case, the vast majority believe that higher inflation could be long-lasting and remain far above the Federal Reserve’s target of 2%.

Gold today on a technical basis had a major breakout as it traded and closed above $1800 per ounce. The chart included in this article has an upper-level resistance line based upon the series of lower highs in June 2021 ($1920) compared to the highs of September 2021 ($1836). On Friday of last week, gold traded to a high of $1815 but could not sustain a close above $1800. However, that changed today with gold futures basis the most active December 2021 contract opening at $1794.20 and closing solidly above $1800 per ounce. As of 5:45 PM, EDT gold futures are currently fixed at $1808.90, a net increase of $12.60 or 0.70%.

Wishing you, as always, good trading and good health,

Gary S. Wagner - Executive Producer