Todd's Take

Why This Is Not Your Father's Inflation

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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U.S. crude oil production fell sharply in 2020, losing a quick 26% as the pandemic arrived. The industry is still trying to heal from severe financial losses, and current production is 1.4 million barrels per day (bpd) short of the pre-pandemic level of 13.1 million bpd. (Source: U.S. Energy Information Administration)

As you've probably heard by now, consumer prices are on the rise, and you can't tune into business news without hearing concerns about rampant inflation. The Dec. 10 report from the U.S. Labor Department showed consumer prices up 0.8% in November and up 6.8% from a year ago -- the largest annual jump since June 1982.

The Dec. 10 report of producer prices was no better, showing a 9.6% increase in November from a year ago -- the largest hike since annual data was first calculated in November 2010. Surely, something is amiss and the popular opinion in the press seems to be that the Fed has been too lax in its role as guardian of the currency.

Federal Reserve Chairman Jerome Powell has taken a lot of criticism for describing this inflation as "transitory," a term he now says needs to be retired. At least one U.S. senator has publicly called for Powell's resignation.

Taking a look at the market's own clues, we see the U.S. Dollar Index trading near its highest prices in over a year and spot gold prices down 3% from a year ago -- not what you would expect in an inflationary environment.

Add to the list of unexpected findings, yields on 10-year Treasury notes are at 1.42%, down from the March peak of 1.66%. If the U.S. is experiencing runaway inflation, someone should tell bondholders because they don't seem to have any idea.

Is this a case where the market is drastically out of touch with the reality of the rising prices that we all see around us? Should the U.S. dollar be lower and gold higher? Should yields on 10-year T-notes be sharply higher?

Not necessarily.

Part of the problem has been the widespread confusion over the kind of inflation we are experiencing. In today's conversation, inflation refers to rising prices, regardless of the cause. But until we understand the cause, we can't understand the solution.

Like many, I first became acquainted with inflation in the 1970s. In 1971, President Richard Nixon took the U.S. off the gold standard and announced a temporary plan of wage and price controls. Neither policy inspired confidence in the U.S. dollar, and the result was nearly a decade of rising prices.

The higher prices of the 1970s resulted from a widespread loss of confidence in the dollar, a problem that was quickly fixed after President Jimmy Carter hired Paul Volcker to run the Federal Reserve. Volcker let the federal funds rate rise to 20%, and the problem was solved. The annual rate of inflation peaked at 14.6% in March 1980, seven months after Volcker first took office, and has not been that high since.

Fast forward to the current situation, and many are looking to the Fed to solve the problem again. However, the cause of rising prices is not the same. Today's situation is not about a lack of confidence in the U.S. dollar.

So, what is causing today's higher prices? The best clues are in the Labor Department's consumer price index report. The Dec. 10 report of November prices shows the largest annual price increases in the energy sector. Fuel oil prices were up 59% from a year ago, gasoline prices were up 58% and utility gas service was up 25%. The next offenders are used cars and trucks, up 31% and new vehicles up 11%.

Do we know of any reason for energy prices to be higher than a year ago? Yes, we do. The U.S. economy was hit with a pandemic in early 2020 that shut down gasoline demand and quickly took domestic oil production down 25% from a pre-pandemic high of 13.1 million barrels per day (bbd).

You may also recall Saudi Arabia took advantage of the situation and increased oil production, driving world oil prices sharply lower in the process. Here in the U.S., spot oil fell to a negative $40 per barrel, and there were concerns about where the U.S. would put all the surplus oil that was rapidly filling storage facilities.

For the oil industry, 2020 was a financial wreck. According to the Houston Chronicle, over 100 oil and gas companies filed for bankruptcy in 2020 (see…). Here in December 2021, U.S. oil production has rebounded, but is still short 1.4 million bpd, or 11% from the pre-pandemic level.

Natural gas suffered a similar fate and is still down 3.0 billion cubic feet per day from its pre-pandemic peak of 117.0 billion cubic feet per day. Demand for energy rebounded quickly, but production has not. It will take time to get oil and gas production back where they were, and the Fed can't do much about that.

Regarding new and used vehicles, production has been severely hampered by a global shortage of semiconductor chips, another pandemic-related loss. The Fed can raise interest rates all it wants, but it can't produce and ship semiconductors.

Fertilizer prices are not part of the consumer price index but are a big concern for farmers. Anhydrous priced at a national average of $1,372 per ton has nearly tripled since the start of this year. Along with this year's higher prices and supply disruptions comes a widening gap of trust between consumers and producers. It is not surprising in this strained environment that the Department of Justice is being asked to investigate.

Again, the cause of the rising prices matters. In example after example, we see situations that won't be fixed by higher interest or any Fed policy.

On Wednesday, Dec. 15, the Federal Reserve ended its two-day meeting, saying it would cut back on bond purchases starting in January. Fed projections showed the federal funds rate is expected to increase somewhere between 0.4% and 1.1% in 2022, up from the current rate near zero. Where rates go depend on the economy, and the Fed made it clear that "the path of economy continues to depend on the course of the virus."

In the end, the good news is that we are not experiencing rising prices because the world has given up on the value of the U.S. dollar. The supply knots pushing prices higher are not easily untangled, and the solution is dependent on overcoming any viral threats that hold us back.

The U.S. Labor Department showed 155.2 million U.S. civilians employed in November 2021, down 3.5 million from the pre-pandemic peak. The sooner we all get back to work, restore missing production and untangle the transportation problems, the better for all of us. Until then, there's not much the Fed can do about these higher prices, and that's the tough truth.


Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Todd Hultman can be reached at

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Todd Hultman