There are several factors that will alter inflation expectations in November, but a commodity that is flying under the radar that could make a significant change is natural gas. Natural gas prices have been dormant for years, but the natural gas price spike in November 2018 could make a dent in your heating bill especially if you use natural gas. Natural gas is prevalent throughout the US mid-west, and mid-Atlantic. The weather during the past 2-weeks has been colder than normal and expectations are that heating demand will continue to rise.
Natural gas Prices Soar
In early November, natural gas prices started to climb. The combination of lower than normal inventories ahead of withdrawal season, and colder than normal weather ignited prices. Natural gas had been in a 1-year range capped by 3.66 and a 2-year range capped by $4. The price breakout is somewhat justified by the lower levels of inventories and the rising demand for liquid natural gas, which the US is exporting. Natural gas is mainly used for home heating, but also is used for electric generation and industrial uses. Prices are now 50% higher just ahead of heating season, which will put some upward pressure on consumer costs. This unexpected rise in natural gas could also negatively affect discretionary purchases ahead of the holiday season.
Traders were also short natural gas and very long oil. The trade is now unwinding which is pushing natural gas prices higher while putting downward pressure on oil and gasoline prices. Once this trade is unwound, oil prices could rebound, and it is yet to be determined if natural gas prices will remain at these very lofty levels.
Consumer Prices are Already on the Rise
Inflation at the consumer level in the US are already on the rise. US CPI soared to the highest level seen in the last 9-months in October driven by rent and gasoline. Gasoline has since tumbled which means that the energy component might be transitory. Unfortunately it will be made up by a surge in natural gas prices. CPI increased by 0.3% in line with expectations after rising by 0.1% in September. CPI increased by 2.5% year over year in October which was in line with expectations. This is up from the 2.3% increase seen in September. The Labor Department also reported that core CPI increased by 0.2% month over month and 2.1% year over year. This was in line with expectations and followed a 2.2% year over year increase in core CPI in September. You can track the changes on a good share trading app.
Rents are rising which is driven by the lowest unemployment rate in nearly 49 years and strong domestic demand. Annual wage growth recorded its largest increase in 9-1/2 years in October, rising 3.1% year over year according to the Labor Department. While the CPI is a strong gauge of consumer inflation the Fed, which has a 2 percent inflation target, tracks the personal consumption expenditures (PCE) price index excluding food and energy, for monetary policy. The core PCE price index has increased 2.0% for five straight months.
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