US inflation fall good news for everyone

With inflation cooling, the US may just have pulled off the much-desired economic ‘soft landing’ but it is a very different situation in Australia.

This is an immensely and globally significant ‘good news story’.

Inflation in the US has now clearly and unambiguously fallen and fallen very significantly – and without throwing what is still the most important economy in the world into serious recession.

Indeed, if anything, the one ‘grey cloud’ in what is looking like a broadly blue – economic and investment – sky, is precisely a consequence of the US maybe just having pulled off the much-desired ‘soft landing’.

The risk is that a thus surprisingly buoyant US economy - despite the Fed aggressively pushing its official interest rate above the inflation rate – could see rising wages keep inflation there stickily in the (too high) 3-4 per cent range.

Our situation, though, is very different and nowhere near as blue-skyish.

In the US, inflation over the year to June was just 3 per cent.

We will get our number for the June year in two weeks.

It will come in about double that, around 6 per cent.

Furthermore, the NSW and Federal Governments – and the Fair Work Commission – are combining to lock in wage rises of 5-9 per cent across a very significant proportion of the workforce.

The US consumer price index report showed that inflation fell to its lowest annual rate in more than two years during June. Picture: Joe Raedle/Getty Images/AFP

The two governments, by conceding a 4 per cent floor, and will eventually award 5 per cent or so. Plus the extra 0.5 per cent being paid on super.

The FWC, by granting a 5.75 to 8 per cent minimum wage increase; again, plus the extra 0.5 per cent on super.

Now, workers clearly need those sorts of wage increases just to minimise the pain of 6-8 per cent inflation; but the cost – in the absence of productivity gains, as RBA governor Lowe has continually warned – is higher inflation.

And higher inflation spells either yet higher interest rates, or high interest rates being sustained for longer, or a bit of both.

I’ve been arguing since late last year that a big fall in US inflation had been “hiding in plain sight”.

On the basis that, while yes, the 12 month inflation numbers were then still too high around 6-7 per cent; that contained a lot of history.

The history, especially the big jump in oil and gas prices after Russia attacked Ukraine in early; plus, the still-lingering impacts of the Covid years on supply chains and critical goods, both industrial and consumer.

It was better I argued to look at a run of recent months in late-2022 and annualise those numbers.

If you did that, you could see – hiding in plain sight – that US inflation had fallen to around 3-4 per cent by late-2022. And that continued through this year.

Indeed, over the last few months, US inflation has run closer to 2.5 per cent on a full-year basis.

And while wages have been growing around 4 per cent and employment has stayed pretty strong. Good news all round.

That’s courtesy of productivity; Jim Chalmers take note.

Yes, stickily higher US services inflation had been a worry, especially for the Fed.

But even that’s now coming down to more like 4 per cent.

The big plus is the end of Fed rate hikes, a strong Wall St. And we see that in our market.