Inflation starts to cool down, is it game over?
One of the big themes I’ve been paying attention to over the past month is the trend of inflation around the world. Last night’s core US inflation read at 0.2% was below expectations, again. It follows a similar trend from the previous month and a paints a consistent picture of other developed market peers.
I sensed the start of this trend early last month (see interview here)
In Australia, the trimmed mean inflation measure which I watch closely rose 0.9% for the last quarter, somewhat in line with where US inflation is tracking.
The inflation fight isn’t over just yet, but we’re probably in the early to mid-stages of the war. Another two or three months of similar data will start to see a big reset in global expectations and then it’s all hands on deck for the next round of rate cuts which could start sometime mid next year.
Oil and energy are the big spoilers, we’ve seen a bit of a bounce in recent months which could keep inflation higher for a little longer, particularly going into the end of this year.
Despite the bounce in oil prices (and natural gas due to Aussie export disruptions), I’m of the view that the steep rise in interest rates is a big enough factor to drive down inflation than any short term commodity increases.
I say this after having a look through Commonwealth Bank’s earnings report this week, the largest of the Australian domestic banks. The good news is that loan arrears are still below mid 2021 levels. The bad news is that while residential mortgages are holding up, other parts of the economy are showing signs of strain.
Most banks like to focus on 90 day arrears, I like to focus on 30 day arrears. These numbers are usually tucked into the back of large, chunky disclosure documents, in this instance, on page 52 of 156. Commonwealth’s personal loan and credit card arrears are rising sharply, but not yet to a troublesome level.
Still, they show that despite record low unemployment, rate rises are starting to bite discretionary budgets. This is good news for inflation, particularly services inflation which is harder to tame and the focus of central bank concern over the past year.
Bottom line: One of the companies I’m starting to admire more and more is Meta (formerly Facebook) due to their approach to AI. When I look at the stock, it’s risen 145% year to date from depressed levels last year.
In hindsight, it was a great time to buy when the news flow was extremely negative. When you’re in the storm, it’s hard to look through and see the sunlight and eventual rainbow. But it usually always comes.
Likewise with inflation. I feel that we are sailing through the storm, we’re probably past the worst and a couple of more months of depressed numbers could see a big change in sentiment. By then, it might be too late to buy the most attractive investments.
Peter Esho is an economist and Founder of Esho Group. He has 20 years of experience in investments and markets.