The hard part about trying to slow growth and lower inflation is to not derail the economy while you do it. If the Fed can lower inflation without causing a recession then this is what we call a “soft landing”. There are some promising signs that growth and inflation are starting to ease. Home builder revenues in the U.S. are down 28% this year and mortgage applications are down 7%. Used car prices appear to have peaked and freight shipping prices have come down. The problem is that the Fed’s track record on guiding the economy lower does not instill a lot of confidence: 10 of the past 13 tightening cycles have ended in an economic recession.

 

GREEN ENERGY AND FOSSIL FUELS ARE A BIG PART OF THE FED’S INFLATION PROBLEM!

 

Producing energy from wind and solar, and especially from batteries, requires an enormous amount of copper, nickel, aluminum, graphite, lithium and other minerals. Each electric vehicle contains about 400lbs more aluminum and about 150lbs more copper than a conventional car. The price of these commodities has increased over the past two years as a result of increased demand. This is illustrated on the chart below. To add to this, the International Energy Agency had a summit to strategize on how to replace Russian oil and gas supplies. It was decided that decarbonization was the ultimate goal, with green energy referenced as the "top priority" in the effort to replace hydrocarbons.

 

On the surface, this makes sense. Using solar and wind to displace fossil fuels would bring the price of oil and natural gas down. However, even if you could ramp up production significantly in the short term, it would still take years to offset enough fossil fuels to bring the prices down. Not to mention what the acceleration of renewables might do to the prices of the chart below.

 

Lastly, in a normal oil and gas environment, these high prices would drive energy companies to increase drilling productivity and undertake large projects that would aim to increase output. However, it's easy to understand why companies are hesitant to spend significant money on large projects that require 10 to 20 year to complete. In the meantime, the market is telling them that fossil fuels need to be phased out by 2030.

 

In the end, it's hard to see how energy inflation will not be with us for the foreseeable future. We wish the Fed the best of luck and hope that they are successful at a soft landing

 

 

I have also included a piece by our CIBC Economics team entitled "When the surprises all go one way"

 

As always if you have any questions feel free to give us a call at any time.

 

Have a great weekend.

 

Milan