Looking at the trends in gold and oil prices, U.S. inflation is expected to rise significantly in the coming year.

Following the release of the U.S. Consumer Price Index (CPI) for April, both the U.S. stock and bond markets rose on Wednesday, May 15th. The lower-than-expected inflation data further bolstered confidence that the Federal Reserve will cut interest rates twice this year, with each cut being 25 basis points.

However, considering the following factors, the aforementioned prediction becomes questionable. Earlier this year, the market confidently predicted that there would be six to seven interest rate cuts as inflation decreased; in the years following the pandemic outbreak, U.S. inflation soared to a 40-year high; moreover, we have heard too much about the Federal Reserve's interest rate cuts being "data-dependent," which, in other words, means that future monetary policy actions are influenced by measures of past economic activity, and there is considerable controversy surrounding the relevant government data.

Last week, all three major U.S. stock indices posted gains, with the Dow Jones Industrial Average breaking through the 40,000-point mark for the first time.

The latest data shows that the CPI rose by 0.3% month-on-month in April, a decrease from the 0.4% increase in the previous two months. The core CPI (excluding food and energy) also saw a decrease in its month-on-month increase to 0.3% in April, after three consecutive months of 0.4% increases. The year-on-year increase in the CPI for April fell to 3.4%, and the core CPI year-on-year increase fell to 3.6%.

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Owners' equivalent rent, which accounts for one-third of the core CPI, rose by 0.4% for the third consecutive month, with a year-on-year increase of 5.8%. However, core service prices excluding housing prices saw a more moderate year-on-year increase of 5.2%. Bank of America economists believe that a 5.2% increase is inconsistent with inflation returning to the Federal Reserve's 2% target.

From some details in the inflation report, health insurance prices have fallen by 12% over the past year and have decreased by 4% compared to five years ago, at least according to the federal government's estimates. Charlie Bilello, Chief Market Strategist at Creative Planning, believes this may be the most absurd data in the inflation report.

Aside from these "picky" details, calculations by Jim Bianco, founder of Bianco Research, show that the inflation trend for the remainder of this year is not optimistic. Bianco estimates that if the inflation trend reflected by the Federal Reserve's preferred core PCE price index continues at the level seen in the first four months of 2024, then the year-on-year increase in the core PCE price index for May should drop to a low of 2.74%.

However, Bianco's calculation results show that from May to November, the year-on-year increase in the core PCE price index will rise to 3.47%, which is far above the Federal Reserve's 2% target, rather than approaching the median of 2.6% in the latest Summary of Economic Projections released by the Federal Open Market Committee (FOMC) in March.The year-over-year change in the core PCE price index is inevitably "rearview mirror" in nature, but it aligns with the public's current pessimistic expectations for inflation trends. The preliminary results of the University of Michigan's Consumer Sentiment Survey in May showed that U.S. consumers' expectations for inflation over the next year increased from 3.2% in April to 3.5%, higher than the pre-pandemic range of 2.3%-3%. A survey released last week by the Federal Reserve Bank of New York also found that consumers' expectations for inflation over the next year rose from 3.0% in March to 3.3% in April.

Furthermore, Jamie Dimon, the CEO of JPMorgan Chase, continues to express his concerns about the future of U.S. inflation. In an interview with Bloomberg Television last Thursday, Dimon said, "Inflation may not disappear as people expect." The reasons include costs associated with climate-related investments, defense and infrastructure spending, trade disputes, and fiscal deficits.

However, the best clue to judging the direction of inflation may not come from surveys or macroeconomic models, but from the market, according to David Ranson, the head of forecasting consulting firm HCWE and an occasional contributor to Barron's. Ranson believes that traditional indicators such as unemployment rates, wages, GDP, and money supply have received a lot of attention, "Yet, a curious fact is that among all the economic characteristics that everyone tries to explain and predict, inflation is one of the easiest to explain and predict, but you have to know which indicators to look at."

Ranson's approach differs from that of most mainstream economists (although he holds a Ph.D. from the University of Chicago), as he predicts inflation by observing market signals rather than relying on models. In judging inflation trends, Ranson uses a very simple formula – he even calls it "very primitive" – which derives from changes in oil and gold prices and can provide a strong signal for future inflation trends.

Ranson studied the annual prices of benchmark West Texas Intermediate (WTI) crude oil and gold since 1986, looking at whether the prices of oil and gold rose or fell relative to their respective median prices during this period, and then calculated the changes in the Producer Price Index (PPI) for the following one, two, and three years.

As shown in the chart above, in those years, when the prices of oil and gold rose relative to their respective median prices, the PPI showed a very significant increase in the following years. When the prices of oil and gold fell relative to their respective median prices, the PPI did not rise much. Additionally, looking back at the data since 1949, in the 27 years when both gold and oil prices rose year-over-year, the PPI averaged an increase of 7.3%.Lanson further discovered that the producer price is a leading indicator of consumer prices. Indeed, consumer prices are dominated by service industry prices, especially housing prices, but when producer prices rise, the four-year cumulative average increase in consumer prices is 16.4%, and when producer prices fall, the four-year cumulative average increase in consumer prices is more moderate, at 9.5% (a compound annual increase of 2.3%, not far from the 2% target set by the Federal Reserve for the core PCE price index).

Last Friday, the settlement price of gold futures for delivery in May at the New York Commodity Exchange reached a historical high of $2,412.20 per ounce, up 32.8% from last October. At the same time, the futures price of West Texas Intermediate crude oil is currently around $80 per barrel, higher than the $70 or so a year ago (after Hamas attacked Israel on October 7 last year, the oil price once broke through the $90 mark).

From the trend of gold and oil prices, Lanson concluded from his model that "U.S. inflation will rise significantly in the coming year."

Federal Reserve Chairman Powell said that due to insufficient progress in achieving the 2% inflation target, interest rate cuts will have to wait a bit longer. In addition, as the "Doctor Copper" and major stock indices continue to hit new historical highs, the market is also "opposing" the Federal Reserve's policy easing.