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Gas Prices Near 6-Year Highs, No Inflation? Who Says

While official government statistics show U.S. inflation at still low levels, anyone who buys gas, food or health insurance can attest to the fact that inflation exists in our everyday lives. GasBuddy has predicted that U.S. consumers will see the most expensive July 4th since 2008 at the gas pump.

Despite the dramatic increase in U.S. oil production in recent years, GasBuddy estimates that Americans are likely to pay about $1.435 billion per day for gasoline during the holiday week, about $50 million more each day, or $350 million more per week than last year.

"Fear about what could happen if Iraqi exports fall prey to violence has altered the calculus for summer oil prices,” says GasBuddy chief oil analyst Tom Kloza. U.S. oil production is as high as it has been since October 1986 and gasoline should be well supplied in all states during the holidays, “but big sellers will probably stay on the sidelines until it’s clear that Middle East exports aren’t threatened,” Kloza adds.

Nearby Nymex crude oil futures have rallied from a low around $91.25 a barrel to nearly $107.75 a barrel since the start of the year. While Iraqi oil exports have not been interrupted as of now, energy traders remain cautious and on edge about a possible supply disruption.

However, inflation is not just emerging in the energy sector —there are concerns about more widespread inflation rebounding in the broader economy. Societe Generale wrote a research report in late June entitled: "American Themes: Prepare for the return of U.S. inflation."

"The next two years –prepare for upside risks on inflation…With import prices bottoming and no longer a drag on inflation, tighter domestic slack should push goods inflation higher. But the real upside is on the service side, as housing inflation heads towards new cyclical highs and healthcare costs reverse their recent weakness," wrote Societe Generale economists.

Ryan Sweet, director of research at Moody's Analytics weighed in. "Inflation has accelerated over the past few months. Inflation is going to overshoot the Fed's target at 2%. We will see inflation above 2% later this year and in 2015 and 2016," he said.

The Fed faces many challenges ahead and they are moving in uncharted waters with their current exit strategy. Never before have they had so many different balls to juggle. There is no playbook for them to fall back upon this time around. Inflation will be a critical factor to monitor in the months ahead. Faster economic growth will naturally inject higher rates of inflation in the economy.

Don't forget about all those excess reserves from major banks that are parked at the U.S. Fed right now. The Federal Reserve Bank of St. Louis tracks this data, and excess reserves totaled over $2.5 trillion as of May. See Figure 1 below. If a pick-up in economic activity were to stimulate demand for lending and banks started issuing new loans, all the ingredients for a quick jump in inflation are there. That would leave the Federal Reserve behind the curve, chasing after the markets and inflation with aggressive monetary policy rate hikes.

Gold has historically been utilized for many purposes —a safe haven investment, a vehicle for capital appreciation and diversification— and also traditionally as a hedge against inflation. While disinflation has been the concern in recent years amid the sluggish growth environment, faster growth will likely be accompanied by a pick-up in inflation. The Fed sees many challenges ahead and the massive amount of bank excess reserves add a more complicated piece to the current Fed exit strategy puzzle.

Kira Brecht is managing editor at TraderPlanet.

By Kira Brecht, Kitco.com
Follow her on Twitter @KiraBrecht



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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