Now, inflation is near it’s low

I began writing in early 2022 that I expect prices (commodities and others) to decline within a combined thesis of mean reversion, inventories being ‘built-up’ and ultimately a pending decline in demand or a buyer’s strike in some circumstances.

In July 2022, this note showed a bunch of charts where I called for a cascade in commodity prices varying between 30% and 60% from prices at the time. We have seen that.

Commodity prices fall 30%-60% will moderate inflation

Then, on August 2, 2022 I followed with a note which explained more of my thinking about why inflation will decline. It also contained a few more links referencing previous notes about the same subject.

Inflation is being left on the shelf.

And then on November 1, 2022 this note contained more charts illustrating the deflationary pressures I was seeing in markets and asset prices.

Within, I said that I thought the U.S. inflation rate would abate to somewhere around 4% – 5%.

Today’s prices look deflationary

That has now happened.

Yesterday, the latest U.S. inflation rate was reported at 4%.

In the attached chart, you will notice how powerful the gravitational pull of that 50 month moving average is.

The previous month, that reading was 4.9%.

Now, I believe that the decline in inflation is nearing an end.

Coming inflation reports over the next 1-3 months may see it reach 3.5% (remember that reported inflation data is a lagging indicator) but that is splitting hairs. The big move has been seen.

Next, I look for inflation to hold these levels at the very least and commence a march up to 6.5% region……..

and so off to figuring out the trades that will benefit from this view.

June 15, 2023

by Rob Zdravevski

rob@karriasset.com.au