Low Inflation? Asset Prices At Record Highs Suggests Otherwise

Last month, the Bureau of Labor Statistics reported that consumer prices rose at an annual rate of only 1.2% in November. The weakness was driven mostly by energy prices, which are still down from the same time last year due to lower demand.

Other commodities, though—particularly food and building supplies—soared in price last year, leading many people to wonder where the 1.2% inflation figure is coming from.

Take a look below. In the past six months alone, wheat prices have shot up more than 25%, corn 35%, soybeans 50%, as Chinese grain imports are hitting new record highs. I don’t know about you, but my food deliveries have gotten substantially more expensive in the past few months, so I have to question inflation being under 2%.

The same goes with building supplies, particularly lumber and copper. For the six-month period, lumber prices have increased 275%, as many mills had to close temporarily due to the pandemic.

Copper, meanwhile, is the best-performing base metal of the year, up more than 32%, beating out other metals such as zinc, nickel, tin, aluminum and lead. The red metal, universally found in electrical wiring and building construction, has benefited from global shortages and strong Chinese demand.

The price surge has been a boon to copper producers. Freeport-McMoRan, one of the biggest copper miners in the world, was among the top 10 best performing S&P 500 stocks of 2020, up 100%. (Tesla, which joined the S&P on December 21, was the number one stock of the year, having returned more than 755%.)

Massive Stimulus, with No End in Sight

Looking ahead in 2021, I anticipate even higher inflation due in large part to easy monetary policy as well as additional government stimulus. Today, the combined balance sheets of the Federal Reserve and European Central Bank (ECB) total a head-spinning $16 trillion. By the end of the year, the two central banks are expected to increase holdings at a combined $240 billion a month, or around $2.88 trillion, according to Evercore ISI’s Ed Hyman.

Then there’s also the $900 billion fiscal stimulus that was just signed into law and the “likely” additional $500 billion in the second quarter of 2021, Ed says.

These programs push up asset prices, from stocks to commodities, and that includes housing. Home prices, as measured by the S&P/Case-Shiller Index, rose to a new all-time high in October, the most recent month of data. At an annual rate of 8.4%, home prices are surging much faster than the headline inflation rate of 1.2%.

Gold Had Its Best Year in a Decade; Ethereum Beat Bitcoin

Like other hard assets, gold and Bitcoin had a very good 2020 as investors, worried about currency debasement from all the money-printing, sought reliable stores of value. Gold surged over 25%, its best year in a decade. The yellow metal has now ended the year up in 16 of the 20 past years, or 80% of the time.

As for cryptocurrencies, all the attention has been on Bitcoin due to it hitting a new record high of…