Reality of Inflation: Almost every commodity is in extreme backwardation, 10y breakeven inflation is less than 3%, US Dollar Index is up 15+% YoY

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by lulzcakes

  • Backwardation

A commodity’s spot price trading lower higher than some given future contract is, in cases, normal (e.g. seasonality or perishable commodities). The backwardation we are seeing today is extreme by any standards.

[Sorry, typo. Backwardation is spot > future. Although this was clarified in the following sentence, the above typo may have confused some people.]

Physical commodities have a cost of carry that include risk premium, accounting costs, storage. For commodities like oil, this cost of carry adds a certain dollar amount to the cost of a barrel. WTI Crude today trades at a 10+% discount six months out from now. The discount 12 months out is nearly 20%.

  • Breakeven Inflation

Markets are pricing in an average inflation much lower than 3% over the following ten years. This is not much further off from rates we were seeing in late 2021. The average 10y breakeven for Q4 2021 was 2.53% vs 2.74% today.

  • US Dollar Index
See also  Russia has the Lowest Inflation in Europe

Most world currencies are tanking, resulting in strong US Dollar performance. Paradigms can shift, so this may become old knowledge, but the past decade has shown that a strong US Dollar results in dollar scarcity and deflationary tendencies. Could a more compartmentalized global economy change this? It is possible although fully theoretical.

This is not all of the data at hand, and the data I have picked align with my beliefs. I believe the former three points are strong, and independently show a comprehensive waning of medium and long-term inflation.


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