Last night’s inflation data in the US is not a one-off but likely to be the first signs of a trend that builds into 2023. The reason we say this is that the goods component of CPI is starting to come back. Goods started the inflation spiral which flowed into services. They’re now reversing slowly.
The higher US dollar and falling energy prices have helped goods plateau and in some cases we’re even witnessing disinflation. For example, used cars (once the worst asset class you could own) are now trending almost 3% lower month on month.
Over the next few months, as recent interest rate rises kick in, this trend will continue and we will be cycling into much higher comparison periods when we start the new year. Clothing, furniture and IT costs have all started to come down too.
Bottom line: The US Federal Reserve will want to see more of a trend emerge, but deep down inside, we think board members will be pleased. Not just that inflation is trending lower, but that the Fed is back in control.
This tightening cycle was never just about the numbers. It was about restoring credibility after the blow-up last year.
If the Fed pivots, it will make it very clear that they are doing it on their own terms and not because they have misread the situation like last time.
For this reason, we think the markets are now looking 3-6 months out and see the writing on the wall. Inflation has probably peaked and rates will remain high for a little while before a completely different game in late 2023. The US dollar will now start its gradual slide back to reality.
Market commentary and analysis from Peter Esho, economist and co-founder at Wealthi
