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If you've been lulled to sleep by years of wonky Federal Reserve talking points about dangerously low to no inflation, you're about to get a rude awakening.
It's not headline news and, no, the Fed isn't running scared yet. But all that's about to change.
Strengthening U.S. GDP growth accompanied by newly enacted tax cuts, strong global growth, and record-high levels of consumer confidence, business confidence, and investor sentiment are driving equity markets higher along with prospects for rising inflation.
The Fed and central banks around the world want inflation, and they've done quite a bit to engineer it.
Here's the big picture and the position to add to your portfolio right away to play inflation's return.
Inflation You Can Bank On
Have you ever wondered what's good about inflation and why are central banks pushing for it?
The short answer is that the opposite of inflation is deflation. Deflation (when prices of goods and services decline) results in declining economic growth as consumers tend to hold off from making purchases, believing they can be had at lower prices if they wait. Production slows down, workers are laid off, prices fall to attract buyers, and the negative feedback loop that destructive cycle engenders is very hard to reverse.
Modest inflation, where prices rise gently, production increases, wages rise moderately, and economic growth expands, is the seed of a positive feedback loop.
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Modest inflation, the kind we've been seeing for a decade now in the range of 0.5% to 1.5% annual increases, is in the best interest of consumers and economic growth.
The proof of that is in all the metrics that matter. Economies around the world are growing again, unemployment globally continues to trend downwards, and standards of living are rising almost everywhere.
But a little inflation, the kind that works for you and me, doesn't work for governments with massive deficits.
Governments that are working around massive deficits want more inflation that puts taxpayers in higher brackets and generates more taxes all around. More importantly, rising inflation that results from more money creation and the increasing velocity of money in circulation throughout economies means there are more claims on the future output of society and, all else being equal, the value of each claim will fall. Since most debt is fixed in nominal terms, higher inflation erodes its real value.
Simply put, higher inflation helps pay down deficits.
The problem with trying to manufacture inflation, especially by flooding economies with $11 trillion of printing press funny money, is that once the genie's out of the bottle, there may be no controlling it.
A Realistic Look at Inflation in 2017
On the surface, based on the U.S. core consumer price index (core meaning that energy and food prices are excluded because of their volatility) inflation came in for the year ending in December at 1.8%.
One problem with watching core CPI is it's simply too broad and too indexed a measure of inflation.
The CPI-All Items price index, which rose 2.1% in 2017, the same growth rate it posted in 2016, is even broader.
What if a narrow reading of, for example, prices that affect inputs of manufacturing and production are rising and no one's paying attention?
What if costs of manufacturing in the United States are rising as the economy's growth rate picks up?
What if the expanding economy is about to get an additional boost from tax cuts?
There's no "what if" about it; this is what's happening. Input costs are rising precipitously.
Copper (or Dr. Copper as it's sometimes called because the price of copper takes the pulse of the economy) has been soaring. According to Bloomberg Commodities Indexes, over the past 52 weeks, the price of copper is up 28.4%.
The price of industrial materials, used to manufacture almost everything, is up 25% over the past 52 weeks.
Cotton is up 25%.
Energy, as measured by West Texas Intermediate crude, is up 48%.
The U.S. Bureau of Labor Statistics measure of energy inflation is much broader than just the price of crude, so it's a lot lower, but it's not anywhere near the 1.8% core CPI number everyone's focused on. The index of energy products BLS uses showed an increase in 2017 of 6.9% after rising 5.4% in 2016.
The point is that headline "core" inflation numbers have been ticking up, but underlying prices of everything economies use to generate so-called GDP growth have been soaring.
"For the first time in nearly a decade, instead of worrying about, 'What if growth stalls?' you're seeing real inflation coming through," says Richard Turnill, BlackRock's global chief investment strategist.
Wage pressure is on the rise after years of ultralow unemployment and meager wage gains.
And inflationary pressures aren't confined to just what's happening domestically.
China's now a bigger factor. As it cuts production capacity in its huge state-owned heavy industries and focuses on stoking consumer spending by its own middle class, it's going to spur domestic growth by trying to keep prices low at home and raising export prices.
"Historically, China's been a deflationary force," says Blackrock's Turnill. "Now it's starting to become an inflationary force."
But none of this means much if you don't know how to profit from it.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of 10X Trader, Shah presents his legion of subscribers with the chance to earn ten times their money on trade after trade.
Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps.
Shah is a frequent guest on CNBC, Forbes, and Marketwatch, and you can catch him every week on Fox Business's "Varney & Co."
He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.