Whip Inflation Now!

Will inflation surge again? CPI comes above expectations for the second time in a row.

Oct 14, 2023

Welcome to MrGekkoWallSt's virtual office!

This is edition number 06 of my newsletter! Here, I organize and share my insights on the market, technical analysis, education, experiences, reflections, and the most relevant news of the period.

Reflection:

This week, I was recalling a brief study I conducted last year on the United States' economy in the 1970s.

For those who don't remember, Richard Nixon formally resigned the presidency on the morning of August 9, 1974, with Gerald Ford being sworn in almost immediately afterward.

The American economy was in the midst of one of the worst economic crises in U.S. history, marked by high unemployment and inflation rising to 12.3% that year after the 1973 oil crisis. Therefore, the Ford administration considered the situation one of its priorities.

In October 1974, in response to the rising inflation, Ford went before the American public and asked them to "Whip Inflation Now" ("WIN").

The president wanted to kickstart a movement to raise awareness about the dangers of inflation, which the government believed was a greater threat to the economy than the high unemployment, which was also a concern.

A series of proposals for public and private measures aimed at directly affecting supply and demand were announced. The suggested actions for citizens included carpooling, refusing thermostats, and starting their own gardens.

The "WIN" buttons immediately became objects of ridicule; skeptics turned them upside down, explaining that "NIM" stood for "No Immediate Miracles," "Nonstop Inflation Merry-go-round," or "Need Immediate Money."

In general, the economy struggled during the Ford administration. Public debt, unemployment, and inflation increased, consumer confidence dropped, and domestic manufacturing declined significantly, primarily due to the strengthening of Asian economies.

In 1976, Ford faced a swine flu pandemic (the H1N1 variant began infecting humans in the early 1970s). Years later, Jimmy Carter's presidency had an economic history of roughly two equal periods.

The first two years were marked by the recovery from the 1973-75 recession, which had drastically reduced investments to the lowest level since the 1970 recession and raised unemployment to 9%.

The other two years were characterized by high inflation, high-interest rates, oil shortages, and slow economic growth.

Stagflation is an economic situation in which a country experiences a combination of economic stagnation and high inflation at the same time.

This is unusual because typically inflation occurs when the economy is growing, and stagnation occurs when the economy is weak. However, in the 1970s, the United States experienced a notable period of stagflation.

The sudden gasoline shortage in the summer of 1979 laid bare the problem and symbolized the crisis for the general public, causing a drop in the president's popularity.

S&P500 Index between 1973-1981

In this week's analysis, I will address:

Reading and perspectives on the Consumer Price Index (CPI).
Oil as one of the main drivers of inflation or deflation.
The social and political impact through gasoline prices.

Inflation

On Thursday, October 12, a positive change of 0.4% in September was announced, compared to August 2023.
In the annualized inflation, the result was 3.7% in September, edging up from the previous reading of 3.6%.
Note that both recent readings came in slightly above market expectations. In theory, this could be a signal that further interest rate hikes may be necessary.
The primary goal and narrative of the Federal Reserve is to bring inflation back to the 2% level.
U.S. Consumer Price Index (CPI) YoY - Investing.com

OIL

In my post number 01, I presented this same oil chart when the price was approximately $93.70 per barrel.
Since that time, the most important energy commodity in the world has corrected by more than 13% and is currently showing signs of recovery.
In September, I gathered evidence that the region would be a selling zone, as a few weeks earlier, Saudi Arabia had announced oil production cuts, which fueled rumors that the barrel could be traded at around $100.
By the way, it was a quite similar dynamic to the peak of $131.50 in March 2022. In advance, there were also announcements of cuts and rumors that the barrel would be traded at around $300 due to the effects of the Russia-Ukraine war.
Stay alert, speculation is everywhere and often overshadows the fundamentals in various situations.

Gasoline

Gasoline, as one of the most important petroleum derivatives, has a strong correlation with its movements.
It is an extremely necessary commodity for the population, businesses, services, and more.
During the gasoline crisis in 1979, despite the global oil supply decreasing by only about 4%, widespread panic resulted in a sharp price increase, more than doubling to $39.50 per barrel in the following 12 months, leading to long lines at gas stations.
That period was a significant example of how a shock in the supply and price of such an essential commodity can harm a government's popularity.
Currently, the gasoline futures market is trading at around $2.18 per gallon.

Final Thoughts:

The inflation rate has undergone its second consecutive increase, surpassing market expectations.

For many, it's already a sign that the overall disinflation that has been in place since Q3 2022 is now being suppressed by inflationary forces, including the recovery of oil prices in 2023.

This expectation reinforces a popular opinion that the Federal Reserve will have to proceed with its monetary tightening schedule to control inflation.

On another note, some argue that the Fed has already done its job, and soon, the disinflationary effect should intensify once again.

Keeping an eye on the trend of oil can help you broaden your perspective on this situation.

Without expressing any political or commercial intent, it's certain that no party seeking reelection would want to face an electoral period with skyrocketing gasoline prices.

I'd like to hear your thoughts on this matter. Are we now approaching a scenario similar to that of the 1970s?

Leave a comment below! Thank you, and I'll see you next time!

Relevant News:

Macroeconomy:

Cryptocurrencies:

Disclaimer:

This is a newsletter where I publish my unbiased analyses and considerations that should not be taken as advice or recommendations. I do not provide financial recommendations for buying, selling, or holding assets, and I do not promise quick wealth. You should conduct your own analysis and decision-making. I believe that knowledge is the key to the financial market, and I am committed to sharing insights that can help you see the market from different angles. If you're not already following this newsletter, consider subscribing. Every week, I share my analyses, experiences, and the most relevant news of the week. Let's investigate the fundamentals, charts, and gather the most valuable insights from the financial market!