1: Show me the money!
While the Fed’s balance sheet and Federal debt exploded during the pandemic, bank credit creation as a percent of existing credit has plummeted alongside money velocity. Outside of government spending, money creation and circulation appear very weak. This deflationary tendency might rear its head if/when the inflationary pulse created by supply chain issues, high commodity prices and government spending subsides.
2: Waning inflationary fundamentals?
The chart below shows the Bloomberg Commodity Index has dropped significantly from it’s recent highs, underperforming the S&P 500 over the past month or so. Does this mean input costs (which eventually hit consumer prices) might decline in the future? One month doesn’t imply a trend, but this is worth watching.
3: Small businesses passing costs on to consumers
Despite near-term commodity price declines, the real costs faced by businesses have risen in response to higher input costs vs last year. The chart below shows the share of (Canadian) small businesses that expect to pass these costs onto their customers.