Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Wholesale Energy Market
Transcript
- Lucas: So last week the May producer price index came in at 1.1 percent month over month, more than double what economists expected. And the big driver—surprise, surprise—was energy. Luna: Yeah, that jump was hard to miss. And it's not just wholesale—consumer prices hit 4.2 percent annually, the highest in three years. Lucas: Exactly. And the thing that caught my eye isn't just the headline number—it's what's happening inside the wholesale energy market. Specifically, the gap between spot electricity prices and forward contracts has been widening for months. Lucas: If you're in the business of buying or selling power, that spread is a loud signal. It tells you the market is pricing in sustained inflation and sluggish growth—basically the stagflation script. Luna: Right. And that's a shift from the usual pattern where forward prices converge with spot as you get closer to delivery. Lucas: Speaking of shifts—this is the kind of analysis that only works because listeners like you help keep this show ad-free. If you find yourself using these insights to make sense of your own energy bills or investment decisions, a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo. That's literally what funds us digging into data like this every day. Luna: Yeah, it makes a real difference. Keeps us independent and focused on the numbers that matter. Lucas: So back to that widening spread. To understand why it matters, you have to look at what's driving it. On one side, spot prices are being pushed up by immediate supply constraints—like the Iran conflict disrupting shipments through the Strait of Hormuz. Luna: Right, that's been a recurring theme since the spring. And the European Central Bank just hiked rates for the first time since 2023 partly because of those energy cost spikes. Lucas: Exactly. So spot prices are reacting to the here and now. But forward contracts—say, for delivery a year out—are being bid up by a different logic: buyers are hedging against the possibility that inflation doesn't cool off and growth stays weak. Luna: Which is basically the stagflation bet. You're paying a premium now to lock in power at a price that might look cheap if inflation keeps running hot. Lucas: Right. And the size of that premium has grown. The forward curve for next-year power in some regional grids is now at a 30 percent premium to the average spot price over the last quarter. That's unusual. Luna: It reminds me of the 1970s energy crises. Back then, utilities and industrial buyers started signing longer-term contracts because they didn't trust that prices would come back down. Lucas: That's the historical echo. In the '70s, after the OPEC embargo, the forward market for crude oil developed a persistent contango—meaning future prices were higher than spot—and it lasted years. We're seeing a similar structure now in electricity. Luna: But here's what I find interesting: not all buyers are reacting the same way. Some industrial companies are actually locking in those higher forward prices, while others are trying to ride out the volatility on spot. Lucas: Yeah, and that creates a two-tier market. The ones with strong balance sheets can afford to hedge. The smaller operators are stuck with spot exposure, which means their input costs swing wildly. Lucas: And that feeds back into the broader economy. When manufacturers face unpredictable energy costs, they pass them through or cut production. Neither is great for growth. Luna: So the widening spread isn't just a technical quirk—it's a leading indicator of margin compression in energy-intensive sectors. Lucas: Exactly. And you can see it already: the May jobs report showed manufacturing payrolls barely grew, even though overall nonfarm payrolls ticked up. Energy uncertainty is a headwind. Luna: Right, and that's the stagflation double whammy. High energy costs slow growth, which keeps unemployment from falling, which keeps the Fed cautious about cutting rates. Lucas: And the Fed's tools are limited. The ten-year breakeven inflation rate—the market's inflation expectation—is sitting at 2.32 percent, up from 2.31. That's not screaming disinflation. Luna: So if the forward premium keeps widening, what does that mean for consumers? We're already seeing higher utility bills. Lucas: It means those bills aren't coming down anytime soon. Utilities that bought forward power at those elevated prices are going to pass through the cost to ratepayers, with a lag of maybe six to twelve months. Luna: So the pain we feel today reflects contracts signed months ago—and if the forward curve stays elevated, future bills will be even higher. Lucas: Exactly. And that's why I think the wholesale energy market is one of the most underappreciated telltales for where the economy is heading. It's not just about oil or gasoline—it's about the price of powering factories, data centers, and hospitals. Lucas: And here's a specific number that struck me: gold futures have rallied 6.6 percent in the last five days alone. Gold miners are up 18 percent. That's classic stagflation hedging—but it also signals deep unease about paper assets. Luna: Right. Meanwhile, the S&P 500 is up 3.5 percent over the same period, but that's driven by a narrow set of tech names. The broad market isn't so confident. Lucas: So you've got energy prices telling a stagflation story, gold confirming it, and equities pretending it's not happening. Something has to give. Luna: That's the million-dollar question. And I think the answer hinges on whether the Iran situation de-escalates or gets worse. Lucas: Right. If supply routes ease, spot prices could drop quickly, and the forward premium might collapse. But if the conflict drags into the fall, we could see that premium become the new normal. Luna: Which would be a very 1970s outcome—high energy prices become structural, not cyclical. Lucas: And that would force a rethink of everything from utility regulation to corporate hedging strategy. The old playbook assumed energy spikes would revert. Stagflation argues they might not. Luna: So what should a listener—say, a small business owner with high energy costs—do with that information? Lucas: If you can lock in fixed-rate supply contracts, now might be the time. The forward premium is high, but if the trend continues, that premium will look like a bargain. Luna: And if you're an investor, paying attention to which companies hedge their energy exposure and which don't might be the edge. Lucas: Exactly. The wholesale energy market is telling us something. The question is whether we're willing to listen.