The Labor Department on Thursday said that consumer prices rose .4 percent in August from July, marking its largest gain since January.

The Labor Department on Thursday said that consumer prices rose .4 percent in August from July, marking its largest gain since January. Much of the move reflected the gain in gasoline prices. But core prices excluding food and energy rose .2 percent, which was the biggest increase since February.

Inflation’s Slump May be Ending, Wall Street Journal, Friday Sept 15. 2017

Regular readers of this column are aware we have been expecting a low in oil prices this fall. That would complete the bear market in prices going all the way back to the $145 peak in 2008 and the $115 lower high in 2014. If this is the case, the recent $44 low would be a higher low than the $25 price seen in February, 2016. It appears the puzzle pieces are falling into place.

The next clue is the price of oil. Oil prices have risen for four straight days. The NYMEX crude close yesterday at $49.89 was the highest since July 31. Brent oil rose .6 percent to $55.47. While we maintain the mood towards oil has much more to shape price than supply, what else could be happening here to rally oil prices? Yes the International Energy Agency reports that global oil supplies have dropped for the first time since August. And that is a drop of 720,000 barrels a day.

The real story is that the demand side is booming. I recently heard an analysis by an Exxon researcher. He forecast huge increases in demand in the growing markets of China and India. These are countries where transport is moving from bicycle to motor scooter to automobiles in one or two generations. And we are talking two billion consumers!

Gasoline futures are falling now that refiners are coming back on line. Natural gas futures have risen from $2.75 in early August to $3.07 on Thursday’s close, yet another positive puzzle piece.

If inflation is rearing its head, we should see some weakness in what has been the robust bull markets in bonds and utility stocks. And that is also the case.

Utility indexes hit a new high last Monday, up 3% for the year. And then the mood towards utilities turned on that proverbial dime. Those same indexes declined 1.7 percent Thursday, the largest drop since February.

Meanwhile Treasury bond prices have begun a retreat. The ten-year note yield has jumped form 2.058 percent to 2.199 percent since last Friday. The conclusion is that this suggests a stronger economy and the prospect for higher interest rates. I have turned bearish on bond prices, expecting them to fall. And there’s more!

The Reuters Jeffries Commodity Research Bureau Index bottomed in late June around 157. It is now closing in on its 200 day Moving Average closing at 183.31. This is extremely bullish for higher prices as the downtrend from the start of this year appears to have been breached to the upside.

The two most significant energy Exchange Traded Funds are flashing buy signals. The energy ETF XLE hit has risen from 62 to 66.55 in the last month. IN the same time frame the Energy Service ETF XES has jumped from $13 to $15.27.

My fears of Apache going to new lows have been erased. It has risen from $38 to $42.22 since its low in late August. Transocean RIG has been trading for the ridiculously low price of 22 percent of book value. Someone has been reading this column. RIG has risen from 7.20 to 9.20 since mid August.

I strongly suspect we have seen the lows in price for the entire energy sector.

And we have another bullish development. The Permian Basin was formed some 300 million years ago. The surface salt water deposits are long gone. But the beach now dotted with mesquite and wild grass remains. And frackers are now discovering that there in demand item, sand, is literally in their own back yards. Kermit, Texas typically only gets headlines when a sinkhole or some other odd geologic occurrence takes place. But just today the Wall Street Journal features a color photo or, yes, a sand mine in Kermit, Texas

The bottom line is, when Kermit, Texas gets a boost in the Wall Street Journal, this is the first sign the boom may be on its way back.

Follow Dennis Elam at http://www.themarketperspective.com.