HAS THE INFLATION WORM TURNED?
Mark Lister, 19 August 2022
Several indicators are pointing to early signs of the inflation worm turning. We’re not out of the woods just yet, but this is definitely encouraging.
It means we might get out of this without interest rates going uncomfortably high, and it improves our chances of avoiding a severe economic downturn.
In the US, the annual change in the headline consumer price index (CPI) fell to 8.5 per cent in July, down from a multi-decade peak of 9.1 per cent the previous month.
While that’s still extremely high and well above central bank targets, the bigger story was the monthly move (or lack thereof).
US inflation was unchanged in July, which means prices didn’t increase at all. That’s the slowest monthly move since May 2020.
An important driver of this shift has been a decline in commodity prices.
Oil is sitting at around US$90 a barrel today, almost 25 per cent down from early June when it was above US$120. These are the lowest levels since February, just before the Russian invasion of Ukraine.
Similarly, the Bloomberg Commodity Index (which tracks a much broader range of commodities) is almost 10 per cent below its highs from ten weeks ago.
That’s fed through to weaker input costs for manufacturers, based on the latest monthly survey from the Institute for Supply Management (ISM) in the US.
In July, the prices paid component of the ISM survey plunged from 78.5 to 60.0. That's the lowest since August 2020, and it represents the biggest monthly fall since 2010.
At the same time, supplier delivery times fell. This measure of supply chain delays reached the lowest levels since January 2020, just before the pandemic took hold.
The latest producer price index (PPI) figures out of the US confirmed this moderation, with the July PPI declining for the first time in over two years.
The PPI is often considered a leading indicator for where the CPI is headed, because when producers face higher costs they try and pass these on to retailers and consumers.
vv On this front, lower commodity prices, thawing supply chains and an easing of factory costs seem to be flowing through to how businesses are behaving.
The National Federal of Independent Business asks small businesses in the US every month whether they intend to raise prices in the months ahead.
After being elevated for most of this year, the proportion responding with a yes has fallen to a 15-month low.
We haven’t seen the same moderation in New Zealand just yet, with the pricing intentions part of the ANZ Business Outlook survey still at very elevated levels.
There’s also been little sign of wage growth slowing, either here or in the US. That alone will keep central banks focused on curbing activity, which means policy interest rates are still headed higher for now.
We can’t declare victory just yet, but we should be encouraged by some of these international trends.
Softer commodity prices, falling input costs and signs of global supply chains easing all point to inflation moderating in the months ahead. That hasn’t shown up in all of the official figures just yet, but it will.
If the interest rate hikes we’ve seen from the world’s central banks can also take the edge off demand, maybe policymakers can still orchestrate the elusive soft landing they’re hoping for.