There is concern that the recent drought will lead to a massive spike in inflation, as Citi technical analyst Tom Fitzpatrick said in an interview with King World News.
He uses two charts to forecast the likely inflation that will occur due to the drought: Brent Crude and the DJUBS Grains Index. Both charts point to very high prices in the near future, as the DJUBS Grains Index has already risen 38% in the last eight weeks and a steep rise in crude prices as well.
“The combination of these charts is very concerning. While the US would also be susceptible to this drag there are a number of things which would suggest that this dynamic would hurt Europe more,” said Fitzpatrick.
Here’s the grains chart:
Photo: King World News
Fitzpatrick’s reasoning for how hard Europe would be hit if commodity inflation occurs is based on his team’s view of the Euro against the American dollar, which they expect to be in the range of $1.10-1.15 this year and even lower over time.
If our EURUSD view is correct (1.10-1.15 this year and lower still over time) the change in price of commodities in EUR terms would be greater in any rise and less in any fall of Commodity prices than in USD terms.
The US is in full blown fiscal and monetary expansion and has been pretty much that way for the last 3-5 years. Europe remains mired in monetary and fiscal policies that are creating a downward spiral in economic growth and driving peripheral countries into a recession/depression scenario.
Additionally, Fitzpatrick believes the impact of inflation will make it “increasingly difficult for Germany to absorb the ‘banker of last resort’ for the Euro zone.”
Commodity inflation will certainly hurt the US economy, but it could be much more severe in Europe if Citi’s call on the Euro is accurate.
Read more and see more charts at KingWorldNews.com.