Editor's note: This is an excerpt of an article written by Hedgeye Managing Director Moshe Silver just published on Fortune.
FORTUNE – Believe it or not, commodity prices are breaking out right now as other inflationary pressures continue to build. Don't believe it? Take a look at gold prices. They have already risen over 7% year-to-date as the S&P 500 has fallen 1.5%. Meanwhile, the CRB Commodity Index is up 4% year-to-date.
Something is stirring here and it doesn't have the whiff of deflation.
If U.S. Federal Reserve Chair Janet Yellen decides to "rescue" equity markets by reversing the central bank's plans to scale down its bond purchases, the impact could knock down the U.S. Dollar and trigger investors to chase yield, which would drive up inflation hedge assets and likely spark another round of growth-slowing commodity inflation.
After peaking in 2011-2012, commodity prices cratered in 2013. Because of last year's price declines, period-to-period comparisons are especially sensitive, so even a moderate commodity price increase looks inflationary year-over-year. This is an optical effect, not yet an economic reality. But policy – and market panics – are made in response to how things appear, not how things actually are.
Hedgeye CEO Keith McCullough says we are unlikely to see 2011-2012 style actual inflation (which the Fed did not see at the time.) But, as people perceive the rise in commodity prices alongside decelerating growth and declining stock prices, there will be speculation that the Fed will again loosen policy to support flagging growth. If Yellen reverses plans to scale down the Fed's bond purchases, a process dubbed, 'tapering,' your stocks will lift temporarily. But globally the dollar will suffer, causing inflation to rise faster.
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