TS Lombard: Resurging Inflation

Taking energy as an example, the rule-of-thumb the old-time traders used was 10:1 i.e. a twenty percent increase in the price of oil flowed through the economy to result in a 2% rise in the general price level.

Because the economy is so much less energy-intensive than it was when those old boys were counting on their thumbs the ratio is probably 20:1, maybe even 25:1 but it still adds up. the recent 30% or so increase in the price of oil, unless it is quickly reversed, means a 1% - 1.5% increase in CPI.

And then you have wage increases. I'm all for private-sector unions asking for as much as they think they can get, It was Samuel Gompers, labor leader extraordinaire, who rhetorically asked what labor wanted and answered "More"* but the math is the math and if the United Auto Workers get the 46% wage increase they are asking for it will raise prices.

Throw in a dozen other examples and that's my rationale for bastardizing Santayana with his "Only the dead have seen the end of war" observation: Only the dead have seen the end of inflation.

Via ZeroHedge, September 4:

....TS Lombard noted that unless employment breaks soon, inflation will likely reaccelerate. This would be due to corporate profits turning a corner after a slight slowdown.

The report's key points are:

• Surprise upturn in Q2 nonfinancial profits (taxes fell) stabilizes wages and hiring.
• One quarter is not a trend, and Q3 sees raised capital costs for firms.
• Employment trends, mixed for now, have added importance – if they do not bend soon, it means profits are improving and more hikes are coming.

The report's author, Steven Blitz MD and Chief Economist concludes:

"In sum, the profit pickup in Q2 means that the coming run of employment data has added importance. To be clear, there will be nothing in the August report to push the Fed to hike in September. But current employment trends reflect profit losses pre-Q2, and inflation lags employment. If, employment data show some undue strength, then, rounding back to the turnaround in Q2 profits, an uptick in hiring would be a strong signal that the Fed will raise rates further."

He goes on to add we are not out of the woods on a recession yet:

 "I still lean towards recession sooner than later, based on the jump in real yields at the long end and the inventory cost-of-carry, on top of everything else – including warnings to mid-size banks to get their balance sheets in order."

But his analysis does put a no-recession chance firmly on his radar which would accompany a reacceleration of inflation... If the job market does not crack soon....

....MORE
*The full quote:

“We do want more, and when it becomes more we shall still want more. 

And we shall never cease to demand more until we have received the results of our labor.”