Don't Look Now, But Inflation is Fading. Fast.

What started as a trickle may soon turn into a flood. I'm not sure what's driving the downturn in over a dozen commodities, but it could be the market psychology, being hammered into us every day as THE lead story (in between obligatory mass shootings) in that inflationary fears have really spooked the markets and prices for all kinds of products, including the cost of money itself, is dropping. And in some cases, fast.

First, mortgage rates. When the 30 year fixed spiked to near 6.0%, I knew that was a preposterous overreaction. Now it's plummeted to 5.3% and in a very compressed time frame. No one has seen this since 2008, and I don't have to remind you what triggered that one.

Next, wheat, corn and soy prices have all weakened. Now the war in Ukraine, which is known to be one of the top producers of grains in Europe, has caused some strains in supply. However, the market is buying another side of the story.

Wheat prices have almost retraced back to pre-war prices. And that means that the food component of the CPI is about to get dinged.

Then there's lumber, which has been on a wild ride since COVID hit after years of relative stability. Some homebuilders have remarked that the lowered cost will do a lot to offset higher wages the industry has had to pay recently, which should support homebuilder performance.

Then, there are the prices of industrial metals like tin and copper. Looks like someone is pricing in a slowdown. But there's more than meets the eye here.

With employment still robust and consumers packing showrooms and airports, people's actions aren't matching what they tell pollsters. The same is true of gasoline prices. The last time a price spike hit, there were lines out the door to buy economical compact cars while Cadillacs collected dust on showroom floors. That isn't happening now, and it looks like consumers are just accepting it like it was a washed out weekend. Just an inconvenience to endure.

And they're right.

Why? Well, one of the smartest observers on Twitter noted the following:

And as much as the markets have a tendency to exaggerate upward spikes in all sorts of traded commodities, the exit gets pretty crowded once a few traders start closing out positions and enjoying their profits, leaving the bagholders behind to lick their wounds.

What does this mean for monetary policy? It could mean the Fed has already accomplished a good deal what it set it out to do. Let's hope they realize it and not squeeze the markets too much more. They may have already accomplished the "soft landing" they worked towards.

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