Could Inflation Decline Soon?

Warren Buffett, the Oracle from Omaha.

I’ve watched, for several weeks, as the country’s concern over Inflation has grown. Throughout the year, public opinion polls have ranked Inflation as the number one or two issue on people’s minds. Inflation is often the number one story on hourly newscasts. And I even saw the Oracle from Omaha warn of higher Inflation.

The country seems to have come together, at least on this one issue. We can all agree that Inflation is a pernicious financial woe that hurts us all. Most have concluded that Inflation will be with us for quite a while.
And it is at this point that I have my doubts.

Before we begin, I’m fully aware that they booed President Biden out of the building when he suggested that Inflation might be fleeting.
Here’s the problem, we generally measure Inflation on an annual basis. So throughout 2022, Inflation, from this point of view, has been running around 7% or 8%.

Biden saw, or more likely was told by one of his aids, that in June (only), there was no inflation. Or, better put, Inflation was unchanged from the month before. That White House Aid should have known better! Biden repeated that comment and was roasted. So, I’ll keep my “p’s and q’s” straight and only talk about annual Inflation.

The other issue we’ll run into is that there are different measures of Inflation. You and I consider the “Consumer Price Index” to be the only measure of Inflation. The CPI is a basket of goods and services in most American cities. The CPI is what Newspapers and reporters refer to as just “Inflation.” So today, that’s what we will use.

Our story begins with the Covid Pandemic. By June 2020, the economy was flat on its back. Recovery took the combined efforts of the US Treasury and the Federal Reserve, pumping trillions of dollars to bring commercial activity back. In less than a month, this extra cash had the desired effect. The CPI began to rise from zero in June 2020 to a high of just under 9% two years later, a historic climb in the inflation rate in just over 24 months.

These external inputs powered this move — the Covid Lockdown depressed the economy, then the massive money printing began the Inflation. The chart (which you can find at tells the story. Inject what ended up being $15 trillion into the financial system, and you’ll get Inflation to me. It’s as simple as that.

So that’s how Inflation began; where is inflation today? First, the stimulus stopped. Those checks to corporations and taxpayers are no more. Indeed, the Money Supply has flattened since that initial pushback in 2020.

Money (M1, blue), Inflation (CPI, red)

And I believe that Inflation was caused directly by the stimulus. So, we should expect to see it dampen now that the push has stopped. It’s early, but perhaps this contributed to the slight reduction in August’s Inflation.

There is another set of indicators that traditionally have pointed to the direction of Inflation. These are the commodities markets. Commodities are susceptible to Inflation, rising and falling with the CPI.

For the last 4 or 5 months, commodities have been falling in price, another indicator that Inflation is easing — the food complex, wheat, corn soybeans are all down double digits. However, two food markets: cattle and rice, are unchanged. For the clothing makers, cotton is down by nearly 40%, while copper and lumber are down big for the construction trade. Copper is down 30%, lumber down 65%. And the ultimate inflation indicator, Gold, is down 18%.

As someone who has been observing financial markets for a long time, it’s hard to reconcile the move in these futures markets with the continued belief that current Inflation will be around for a long time.

Finally, I have one more indicator to consider. On Wednesday, in addition to their interest rate decision, the Federal Reserve released its latest economic projections, including the direction of Inflation. You may feel a little suspicious about one, but I think we should at least listen to them.

The Fed concurs that Inflation is moving lower. Next year they see Inflation down 50% from the current level. The Fed does use a different measure of Inflation (PCE Inflation) but translated, this would mean Inflation down around 4% next year and down another 50% in the 18 to 24 months following that. And back to a target range of 2% inflation in 2024.

When you’re in the middle of a storm like we are with Inflation, it’s hard to visualize the end. But there is solid evidence that, barring the unforeseen, things are likely to get better soon.

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David Reavill

David Reavill writer + finance +iconoclast + hiker + Pennsylvania #valueside daily podcast + medium + meditate