Inflation Worries?

We have posted a graph comparing the changes in gold and crude oil prices (WTI), starting from February 1st of this year up until today (6/1/26). Common economic theory would be that gold prices (in red above) should rise during times of rising inflation and threats of war; yet that is definitely not happening this year, for the value of gold has been declining while consumer prices are moving higher.

We believe that the primary cause of the recent spike in the consumer Price Index is the skyrocketing rally in crude oil prices (green in the chart above), which have been driven higher by the U.S./Israeli war against Iran. The official record shows that U.S. inflation hit its highest annual rate in three years in April 2026, with the Consumer Price Index (CPI) rising 3.8% over the past year — the steepest increase since May 2023. 

Today’s price action is especially noteworthy. At one point, crude oil prices jumped by as much as 8.5%; yet, at the same time, gold prices declined by as much as 2.4%. In the meantime, all the major U.S. stock indexes made record highs today, so it seems that stock investors do not seem to be too concerned about higher inflation, as they buy equities and shun gold. What is going on?

For one thing, we note that the U.S. Bureau of Labor Statistics (BLS) has, over the years, made a number of major changes in the way it calculates the formula for the Consumer Price Index.  We think it is possible that the declining price of gold is implying that the rate of inflation is not as bad as the current CPI Index states it to be.

One factor we have always questioned is the housing component of the CPI. It is one of the largest parts of the CPI market basket, and it measures the cost of the housing service that a housing unit provides to its occupants, not the value of the home itself. Every month government officials guess/estimate/measure the actual rent paid by renters, the implied rent for owner occupied homes (calculated as the cost of renting a comparable home in the current market without furnishings or utilities) and lodging away from home (motel and hotel rates). With that many factors, it would be very easy to miscalculate what the actual number should be.

So, what is happening to housing in the real world? In a word, we would say that the housing market is definitely “soft.” Look at the recent headlines:

Over Half Of America's Largest Cities Are Seeing Home Price Declines | ZeroHedge. More than half of the 20 major U.S. housing markets recorded year-over-year price declines in March, reflecting a broadening and deepening housing slowdown,"

Then there is this headline:  Condo Prices Already Dropped By Up To 33% In 24 Bigger Markets | ZeroHedge. “The price drops are getting relentlessly steeper:

Here’s another headline: Rental Prices Are Declining Nationally.  Rental prices in the U.S. have been falling for 25 consecutive months as of August 2025, marking the longest stretch of year-over-year declines since pandemic-era tracking began in 2020. Realtor.com.

What is causing these housing price declines? We think it boils down to the old economic law of supply and demand. In many areas, housing prices rose dramatically following the covid pandemic; now they are falling back to earth, as potential buyers and renters push back on the higher pricing. We also would not discount the disappearing demand from the migrants who came to the United States during the Biden Presidency. They all needed a place to live, but now many of them have returned home, and very few new migrants are now crossing the border illegally. It amounts to sharply declining demand for housing, especially at the lower end of the housing market.

There is also the matter of increased supply. Builders in our home of Naples, Florida are flooding the market with new condo buildings.  They have been asking for sky high prices, but they have gotten fewer takers, and the increased supply of condos is now depressing prices.

Also, you cannot discount the political pressure. President Trump has taken the lead, but there is now a bi-partisan agreement that large corporations and hedge funds can no longer be allowed to own large number of homes and condos and rent them out to the American people. If these purchases by large conglomerate is stopped, it should follow that the housing stock will increase, and that should work to depress housing prices. Look at these recent headlines.

President Donald Trump on Monday called on Congress to permanently ban large investment firms from buying single-family homes, arguing corporate purchases are shutting families out of the housing market.

Congress Moves to Limit Investor Home Buys | Newsmax.com Bipartisan Homes for American Families Act Aims To Ban Large Investors From Buying Single-Family Homes

One bill, the "Homes for American Families Act," prohibits large institutional investors from buying single-family homes, townhomes, and condominiums. The bill defines these large entities as real estate investment trusts, insurance companies, investment companies or private funds with at least $150 million in assets under management.

The other bill imposes a 15% excise tax on 'hedge fund taxpayers' with $50 million or more in assets under management, and cutting other tax breaks. This would encourage large investors to divest their holdings, two senators said in a joint statement.

Knowing all this, what will the future bring? Crude oil prices did spike higher with the onset of the Iran war, but we note that the current price is significantly below the immediate price reaction. If the war continues over a long period of time, we would agree with many energy experts that there should be another sharp rise in energy prices. Barring that, we expect a slowly declining oil market as supplies increase and demand declines. 

We also expect that the trend of higher equity prices will continue, although at a slower price. As for gold, if war and a higher inflation can’t bring about higher gold prices, we cannot imagine what will, and we think the price of gold should continue to decline in the short-run, perhaps by another ten percent.