Investor angst concerning inflationary pressures

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Tomorrow the U.S. Bureau of Labor Statistics will release the most current inflationary data. Two primary metrics are used to reveal inflationary pressures. First is the CPI, or Consumer Price Index. According to Investopedia, “The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living.”

Although it is the most widely used measure of inflation, Investopedia explains that the CPI “measures the change in the out-of-pocket expenditures of all urban households and the PCE index measures the change in goods and services consumed by all households, and nonprofit institutions serving households.”

The Federal Reserve prefers the PCE (Personal Consumption Expenditures) as their go-to inflationary page. The key difference between these two indexes is that the PCE strips out costs for both food and energy.

Regardless of which inflationary index you view, both indexes have been at their highest levels since 2008. As a direct result of the 2008 financial crisis, the average annual inflation rate was nearly double (3.8%) the Federal Reserve’s target of 2%. More alarming in that 2008, which saw inflation run as high as 5.6% and 5.4%, was the highest level of inflation in 17 years.

Currently, inflationary pressures have reached an alarming rate, with the annual inflation rate in the United States currently at 5.3% for the 12 months ending in August 2021. This follows to increases to 5.4%. This is according to the U.S. Labor Department data, which was published on September 14.

According to the BEA (Bureau of Economic Analysis, U.S. Department of Commerce) the overall PCE inflation rate was 4.3% on a 12-month basis.

Although the Federal Reserve maintains that the vast majority of the inflationary pressures are transitory and will not be sustained over time. Many analysts disagree with a large part of that assumption. However, they acknowledge that the inflationary pressures from supply chain issues and tepid labor expansion persist. If the Fed is incorrect, the repercussions could be devastating for the economic recovery in the United States.

It is for that reason that tomorrow’s inflationary data will be so critically important as we get closer to reaching the highs of 2008, coupled with the fact that the Federal Reserve has very little control on inflationary pressures it could derail the current monetary policy changes that the Federal Reserve plans to implement such as tapering in November of this year.

Today, gold futures gained $4.50 in trading, with the most active December contract fixed at $1760.20. Fear of rising inflation has put a momentary pause on risk-on appetite and, in turn, has become highly supportive of gold as a safe-haven asset and protection against inflationary pressures.

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

Gary S. Wagner - Executive Producer