Inflation Has Peaked
The latest Inflation report offered some comfort for markets. Inflation was basically flat from June to July and up 8.5% year-over-year.
Obviously, one month of data does not make a trend. However, with the Fed's efforts to dampen demand still ongoing, the recent loosening of the supply side stranglehold on price should alleviate some of the pressure, allowing us to return to a more manageable inflation rate by year-end.
Much of the recent pull-back has been attributable solely to the reduction in oil prices, but in recent weeks and months, we have seen dramatic drops in prices across the board.
The New York Fed's Global Supply Chain Pressure Index fell in July to its lowest level since February 2021 as supply chains ease.
Global Supply Chain Pressure Index Retracts from Highs
Source: NY Fed
Oil and Commodity prices are selling off.
Crude oil prices have fallen sharply to below $100 per barrel after surging to $139 in March and now sit at ~$90 a barrel.
CFD’s on WTI Crude Oil
Other commodity prices are also coming off the boil. The agricultural commodities (i.e. cotton, wheat, corn, soybeans) have shown significant weakness since mid-June, which will trickle through the system and lower consumer price pressures.
S&P GSCI Agricultural Index
Source: Financial Times
Bizarrely, Wheat is now trading below where it was when the Ukraine war started. This reversion in Oil, Gas and Wheat prices has resulted in a considerable drop-off in the ‘War Inflation’ Index.
War Inflation Subsides
Equally weighted Brent, Europe natural gas and wheat prices
Source: BofA Global Investment Strategy, Bloomberg
On the transport and logistics side, the cost of shipping a 40-foot container from Shanghai to Los Angeles is down dramatically. (via @LizAnnSonders)
U.S. used car values are also in a strong downward trend. (via @LizAnnSonders)
The list goes on.
There is, of course, some upward inflationary pressure in the market, especially in areas such as rent that tends to have a lagged effect, and prices elsewhere could always revert.
As well as that, there is always the tail risk of some exogenous macro shock disrupting the entire system once more (war in Taiwan being one).
But for now, let’s concentrate on the known unknowns.
Supply chains have improved dramatically since their most troubled periods last year. Delivery times are down, transport and shipping is cheaper, trucking capacity is up, and inventory levels are gradually returning to normal.
In my opinion, the probability of runaway inflation has fallen dramatically, and we will continue to move towards a more digestible inflation figure by year-end.
Inflation has not gone away, but the outlook is finally improving.