Yesterday, the Dow Industrials rose almost 1,200 points on the back of a CPI report showing that inflation had slowed to 7.7% year over year.

The market is anticipating that the Federal Reserve will only hike rates by 50 basis points in December, and then that may be it for the rate hikes.

Here’s the issue…

Inflation doesn’t just go away because the Fed hikes rates.  Inflation goes away when demand is crushed.  Demand is crushed by making people too poor to buy stuff.

Right now, a segment of our population, is too poor to buy some stuff.  But, a large segment of the population has not stopped spending at all.

They haven’t stopped because they haven’t lost their jobs.

While inflation has indeed been slowing, it is also still quite high.  Imagine if prices next year are still 7% higher than they are now.

There is evidence that this could indeed be the case.

While inflation has been high here in the US and Europe, one key player hasn’t been buying anything!

China has been in Covid lockdown since summer with its ridiculous zero Covid approach.  THAT is the primary reason that crude oil prices have trended a bit lower since they peaked in June.

Now, however, China appears to be set to ease its quarantine restrictions.  China apparently has introduced a 20 point plan for re-opening its economy.

Think about that for a second.  The world’s second largest economy has been on the sidelines buying nothing while the rest of the world has been dealing with 40 year high inflation.

The immediate reaction is a jump in commodity prices.  As I write this, crude oil is up nearly $3 this morning.  We’re also seeing fairly significant bounces in Copper, Aluminum and Palladium, and minor bounces in grains, cotton and sugar.

Something else I want to point out is this… while many commodities are trading at below their summer price peaks, they are still trading well above where they were a year ago.

Corn for example is trading at about $6.50 per bushel, which is about $1 above where it was a year ago.

Meanwhile, while all this has been going on, the Biden administration has hampered energy production here in the US, and drained our strategic oil reserve by 50%, while there has been a war going on between Russia and Ukraine.

The bottom line is this… inflation just doesn’t go away through rate hikes.  There is still way too much money in the financial system, and some people still have a ton of money they want to spend.

Case in point… a 2.5% share in the horse, Flightline, who just won the Breeder’s Cup Classic, sold for $4.5 million.  That puts his value at about $180 million, which is more than the value of a new 787 Dreamliner jet, valued at $153 million.  Make it make sense.

The last time we had inflation at the levels we’ve seen in 2022 was 40 years ago.  The Federal Reserve jacked up interest rates well into double digits, and we ended up with a pretty brutal recession.

It wasn’t until Reagan’s tax cuts and spending on defense that the economy recovered.  After that, inflation still remained relatively high at over 4% into the 1990’s, when technological improvements began to kick in.

Without some new major technological advancement like the internet, the only way inflation will truly be brought under control will be with a recession.

Sorry to be the bearer of bad news.  Plan accordingly.