Crude and the inflation bogeyman

By Colin Twiggs
December 01, 2017 8:30 p.m. EDT (12:30 p.m. AEST)

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Inflation is probably the biggest bogeyman facing US investors at present. The Fed is expected to raise interest rates in December but this is more an attempt to normalize interest rates ahead of the next recession rather than slowing the economy to combat inflation.

At present inflation remains benign, with the 5-year breakeven rate (Treasury Yield minus TIPS) hovering between 1.7 and 1.8 percent, in line with core CPI.


Bank lending growth has slowed to below nominal GDP, suggesting weaker price growth ahead.

Bank Lending

Corporate profits are likely to remain high provided that wage growth remains muted. The chart below compares corporate profits and employee compensation as a percentage of value added. The two have an inverse relationship: profits tend to rise when compensation falls and fall when compensation rises.

Corporate Profits

If hourly wage rates spike that would have a direct impact on profits because of the inverse relationship. But the Fed is also likely to step in and aggressively hike interest rates to subdue underlying inflation.

For the present, that appears unlikely as wage rate growth has retreated below 2.5 percent per year.

Hourly Wage Rates

The only likely spoiler is crude oil prices which are headed for a test of resistance at $60/barrel — as oil producers persist with production cuts.

Real GDP growth

At present breakout above $60 is unlikely but would increase pressure on both commodity prices and wage rates, prodding the Fed towards further rate hikes.

They say you never grow poor taking profits. No, you don't. But neither do you grow rich taking a four-point profit in a bull market.

~ Jesse Livermore


Colin Twiggs is director of The Patient Investor Pty Ltd, an Authorised Representative (no. 1256439) of MoneySherpa Pty Limited which holds Australian Financial Services Licence No. 451289.

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