Signs emerge that inflation wave has crested

The Baltic Dry Index, a gauge of maritime freight rates, is down 36.3 per cent from this May’s supply-chain-suffocated high. Picture: CFOTO/Future Publishing

Surprise! As you know, the Reserve Bank made headlines with early October’s shockingly small, quarter-point rate hike – flummoxing commentators who expected a bigger move to fight decades-high inflation.

I am no fan of central banks’ work, but the small hike doesn’t seem surprising to me – or bad. Or wrong. Whatever you may think caused hot inflation, signs are emerging globally it likely has crested. If so, that would be a major relief for Australian and global stocks. Consider these transpacific specific realities. Then draw your own conclusions.

Consider energy, a chief inflation driver globally. Cooling energy prices underpinned the August Consumer Price Index slowing to 6.8 per cent year-over-year from July’s 7 per cent. They have also helped slow US inflation since June. How? Oil is down 19.3 per cent from June’s high in Australian dollars. In US dollars, the slide started earlier – oil is now down 29.5 per cent. American average petrol prices bounced in early October yet are still down – 21.8 per cent from mid-June highs.

Food? Russia’s invasion of Ukraine spiked global wheat and grain prices earlier this year, fuelling further fears. And Australia’s sky-high fruit and vegetable prices – exacerbated by this year’s east coast floods – are stoking food inflation locally. But think globally. In America, wheat is down 36.8 per cent from March highs. The UN’s World Food Price Index has fallen for six straight months, currently 14.7 per cent below March’s high.

Most of these improvements don’t show yet in stores or CPI data.

Consider housing. CoreLogic’s Australian Home Value Index fell for a fourth consecutive month in August, down 1.6 per cent from July – the largest monthly decline since 1983. Similarly, US home price gains peaked in March, slowing sharply since as homes taking longer to sell. Home prices routinely lead rents.

For businesses, S&P Global’s Australian manufacturing and services purchasing managers indexes both show easing price pressures. Its September surveys showed manufacturing input prices falling to a 19-month low.

On services prices, which have lagged goods tied to Covid-19 restrictions, respondents reported input cost and selling price pressures falling to seven-month lows. American surveys echo this, showing manufacturers’ backlogs and supplier delivery times are normalising.

Global shipping costs have fallen too. Shanghai Freight rates are down 62.4 per cent since January. The Baltic Dry Index, a gauge of maritime freight rates, is down 36.3 per cent from this May’s supply-chain-suffocated high. This index, when down, is often feared as a global recession warning. Maybe. Sometimes. But a big part of it is surely supply chain snarls improving.

Pessimists claim Australia’s tight labour market augurs higher wages, preceding other prices soaring. They routinely miss what the late Nobel laureate Milton Friedman proved 60 years ago. Wages follow prices – they never lead them. Regardless, Australian hiring slowed in the six months through August (the latest data available). US average payroll gains in the six months through September were 60 per cent of the prior six’s.

Do you think central banks stoked inflation by ballooning the money supply? Globally, M2 growth – a measure of currency in circulation, deposit accounts and money funds – peaked at a whopping 23 per cent year-on-year in late 2020. But it was just 7.2 per cent in June, matching pre-pandemic norms.

Australian M3, a broader measure, drifted to 8.9 per cent in August from January 2021’s 12.8 per cent peak. US M4 – the broadest measure adding in cash-like securities – hit 30.7 per cent in June 2020. It is crawling now, up 2.5 per cent in August.

This is happening despite central bankers’ actions – big or small. Monetary decisions usually hit the economy with a lag by influencing lending. Besides, their interest rate fiddling affects banks’ overnight borrowing costs. But when banks have ample deposits – true almost everywhere globally – they don’t need to borrow overnight to support lending.

Consider America and the “aggressive” Federal Reserve. It has hiked rates by 3 percentage points this year. Yet lending actually accelerated from January’s 4.3 per cent year-over-year to August’s 11.1 per cent. That doesn’t help the inflation fight, as lending creates new money. But it proves the improvements we are seeing aren’t about hikes.

Inflation’s peak will only be crystal clear in hindsight.

Maybe loan growth delays it. But many of the figures I cited are forward indicators inflation data don’t reflect yet. Today’s inflation is like a snake that just ate a big rodent. There is a big bulge in the middle – until the snake digests it one vertebra at a time.

The world ate a lot of inflation two years ago. Digesting the bulge – which is underway – will be a major relief for both stocks and bonds globally, fuelling a rally.

Ken Fisher is the executive chairman of Fisher Investments.