Today’s prices look deflationary

Due to secular underinvestment and the resulting tightness in various industries, I think inflation will stay at levels higher than we’ve been accustomed over the past 25 years.

This is the ‘new’ calculation and consideration for the next decade or so.

However, in the nearer term, I do think they will abate from the current levels of 7%, 8% or 9% being seen today.

If I’m pressed for a figure, let’s say 4% or 5%.

If pundits could cite and prove today’s inflation rate is a result of the rising prices seen across a host of commodities, shelter, groceries, services, etc……why are we (collectively) not acknowledging that falling prices may temper inflation?

Keep in mind that official inflation rates report the prices seen yesterday.

I have collated various charts showing prices rising and since falling.

Remember all of that palaver about soaring Lumber and Steel prices?

Take a look at them now.

This is part of my argument that inflation has ‘peaked’ and so have government bond yields.

I mean, I think we are in the last decile or so.

Other parts of my argument for lower prices in various assets/commodities and a subsequent abatement of inflation has been a combination of my long-term mean reversion thesis along with my written notes about the factor and velocity of interest rate hikes.

The last holdout in price declines remains in various energy prices such as Diesel and Heating Oil.

Interestingly, Crude Oil prices have only fallen 30% from their peak, they are now trading at prices last seen in 2011 – 2013, when U.S. inflation, at that time was being reported between 1.5% – 3%.

Back then, we weren’t making an overall ‘hoo-ha’ that inflation was about to scream higher.

Obviously there is more to this analysis and many variables from renewed supply chain disruptions coupled with continued tighter labour markets and pent-up demand when China fully reemerges from COVID lock-down could thwart this thesis.

Not assigning reasonable probability that these falling prices may/will contribute to lower inflation reports in coming quarters is something that may catch investors or the market, out.

The result of abating inflation will have an affect on suffering longer duration assets, the strong U.S. Dollar and interest rates, which have risen between 11-14 fold from their mid-2020 lows.

Once (if) that happens, then we move onto figuring out where inflation and prices move to from that moment.

November 1, 2022

by Rob Zdravevski

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