Happy Pi Day. Personally, my favorite is Chicken Pot Pie.
March Madness, the least productive time of the year starts this week. Comparable to the week between Christmas and New Years in its impact on productivity, once the brackets are announced and the games begin on March 17, our national sports holiday begins. Enjoy.
The inflation numbers for February could not have been much of a surprise. The month over month rise of .8% carried with it the early jump in energy prices. Add to that the continued rise in food prices and you can see where consumers are being stretched. The core inflation rate was .5%. This removes the energy and food prices. The year over year numbers are 6.4% for the core and 7.9% overall. You need to go back to 1982 for us to have experienced levels like this. While the rise in 1982 was on the heels of three prior years of high inflation, making it actually worse then, the levels today could be considered more impactful since inflation has been under 3% for what seems like forever.
The level of inflation begs the question, how high should our interest rates really be in this inflationary environment? The prime rate in February 1982 reached a peak of 17%. Again, that was after three years of inflation which the Fed was trying to tame. At the beginning of the run up in 1979 the Prime Rate was 12%. The 10 year Treasury Rate in 1979 was 9.44%, hitting 14% in 1982. Prime today is 3.25% and the 10 year Treasury is at 1.99%. Essentially the impact of the Fed’s inaction on short term rates as well as action on keeping long term rates down could be said to be 8.75% on Prime and 7.45% on long term rates, using 1979 as the base. While our economy is still growing at strong levels, that could come to a screeching halt as consumers recoil due to the higher prices. Interest rates will rise, inflation might be here for a while due to the supply shortages and our economy will contract in the coming year based on both factors. This is why the term Stagflation is being thrown around more and more, and not without reason.
We may have seen the peak on oil and gas prices in the past week. Supplies of both crude oil as well as gasoline were flat over the last two weeks. Production was also flat over the past two weeks. Imports of oil rose by 1.9 million barrels. This import level softened the top of the market for the US at least. Russia on Thursday stated that they had found alternative buyers for their oil replacing the amount lost to the West. The new buyers were likely India and China, buying the Russian oil at a discount. What they would have purchased on the open market from other sources is now opened up for the West to replace the lost Russian oil. Remember, oil is a commodity so as long as the overall supply is not lost, where it comes from is economically neutral.
As with our supplies, the number of oil rigs had reached a plateau in February. This past week the total rig count rose by 13 in the US to 663. That is a nice up tick, but one that is far off the peak in 2018 of nearly 1,100. We really need to get back to over 800 to the lower the prices we were accustomed to.
This Spring will be hard on farmers. The fields in the central plains are already being prepared for planting, if the crop inputs can be had. Fertilizers are in extremely short supply. The cost of fertilizer has gone up to unaffordable levels for most farmers. The key decision is to not plant or to plant without much in terms of the chemicals needed for a good crop. The yields this year may be disappointing. In terms of supplies of wheat and corn, shortages are expected as the Ukraine is the bread basket of Europe. Without their production we could see higher food prices continue for well over a year.
Good luck on your brackets, Have a great week.