According to the December 2015 Dallas Fed Economic Letter titled, 'Cheaper Crude Oil Affects Consumer Prices Unevenly', the pass-through time for the non-energy components of the Personal Consumption Expenditures (PCE) Index can be severely delayed. The Economic Letter highlights that though non-energy categories make up 95-percent of the PCE weight, it can take up to six months for 50-percent of the long-run pass-through of price changes in oil to materialize. And more than two years for consumers to realize the complete price adjustment.
For purely technical reasons, I see the price of a barrel of crude oil advancing and remaining above $50. The fundamental rationale will become apparent in time. With this assumption as my anchor, I can turn my attention to Gold, and the US 10-year Treasury. With Crude Oil trending higher over the interim, I would expect the price of Gold to also reflect the sentiment, driven primarily by demand from inflation hedging. The US 10-year Treasury then seems to be the odd-man, as its value is eroded by both realized and expected increases in consumer prices.
The last month's higher prices for the US 10-year Treasury also contradicts the rationale of a fixed-income market that is facing dual headwinds of explicit monetary tightening through FOMC rate increases, and implicit monetary tightening through balance sheet reductions via asset roll-offs. I interpret this to mean the trend of buying that has become apparent in the US 10-year Treasury market in the past month will be relatively short-lived, as there are macro-economic fundamentals that are working to push that market in the opposite direction.
My context for the Inflation Trade is Crude Oil leading Gold higher, and the eventual return to a sell-off in the 10-year Treasury market, especially as the Fed stops re-investing proceeds from maturing instruments.
