December 14, 2016

2017 Will Be The Year Of Inflation

With crude oil prices up over 50% YoY (the most in 6 years), and retail gas prices up over 10% YoY (the most in 5 years), Bloomberg's Garfield Reynolds suggests the Saudis have sealed it then, 2017 will be the year when inflation takes over from disinflation. That’s certainly the tale the market is telling us right now and any devils out there are tucked well away in the details.

The bottom looks to be in for oil. Thanks to OPEC’s capacity to agree among themselves and with “NOPEC,” it’s likely we’ve seen the last of Brent or WTI with a 4 handle at the start of the price for a while.

The new question will be how far up Saudi Arabia is willing to let crude go -- it won’t want to encourage shale oil producers to resume building capacity. Still, a new, higher equilibrium price would restore one of the foundations for inflation.

As UBS shows below, if oil tracks its forward curve then inflation will likely meet (or exceed) ECB and Fed mandates next year...

Those foundations were already looking more stable as indications of stronger U.S. economic outlook, especially labor markets, hint the Fed would finally get the classic, wage-driven PPI and CPI increases it wants.

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