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

American inflation rates tells OPEC when to cut production

Here is a lovely chart showing the price of WTI Crude and U.S. 5 year break-even inflation rate.

To which about the latter, the St. Louis Fed says, ‘the value implies what market participants expect inflation to be in the next 5 years, on average.’

They dance wonderfully together.

The better part of the chart is the lower bit where the RSI (Overbought/Oversold) indicator appears.

Whenever the 5 year breakeven inflation rate is Oversold (as this weekly chart shows), the WTI Crude Oil price finds a floor from which to advance.

We saw an Oversold 5 year b/e rate last week.

This week’s OPEC production cut announcement wasn’t a surprise because this Oversold moment tends to coincide with when OPEC announces production cuts.

Of course, Biden isn’t happy that OPEC have cut production.

Also, he has virtually spent all of the nation’s Special Petroleum Reserves in thinking it was him sending Gasoline prices lower, when it was in fact a combination of other falling commodity prices (which is deflationary), mean reversion in the oil price and rising credit forces at work.

No to mention the importance of Biden needing lower domestic petroleum prices to aide his mid-term election hopes.

OPEC’s production cut may seem to be mathematically synchronised to the United State’s own inflation break-even rates but I think it is equally loaded with a little political payback.

Funnily, the U.S. isn’t pleased with this announcement and have passed on their viewsbut you can’t have a say in a club to which you are not a member of.

Keep in mind, this doesn’t show you when to sell your Oil.

Those are other indicators.

October 6, 2022

by Rob Zdravevski

Watching Currencies – AUD/JPY

Correlations – AUD/JPY and the Australian Inflation Rate

September 5, 2022
by Rob Zdravevski

Australian Inflation Correlations (Natural Gas prices)

As an addendum to last week’s note about elevated Natural Gas (US$ Henry Hub) prices,

here is a chart pitching those American gas prices against the Australian inflation rate, aiding my call for moderation.

September 3, 2022

by Rob Zdravevski

Taming inflation, ask Brazil

Brazil was amongst the first of nations to commence raising interest rates.

They started from a base of 2% in March 2021.

At its August 3, 2022 meeting, Brazil’s Central bank increased interest rates a further 50 basis points bringing its rate to 13.75%.

This was the 12th consecutive raise making for a cumulative 1,175 basis point increase.

This represents a quantum of nearly 7 fold increase.

Brazil’s inflation rate in July 2022 fell to 10.1%, down from June’s 11.9% reading.

Incidentally, Brazil’s inflation target rate is 3.5%.

In contrast, the U.S. Fed Funds Rate has risen from 0.25% to its current 2.5% representing a 10 fold increase. The current inflation rate in the United States is 8.5%.

Is the quantum of the rate increase more relevant rather than the absolute percentage rate?

If so, will one more rate hike in the U.S. be enough?

Brazil, Chile, Mexico and other commodity sensitive and exporting countries all started raising interest rates, aggressively and a year before G8 nations.


As paraphrased in the following posts written over the past year, “inflation is a tax that the poor can’t afford to pay”.

Although, more precisely, the citizens of those nations carry an average household debt as a percentage of GDP nearing 26%.

While the “% of household debt to GDP” for the citizens in the United States, Canada, United Kingdom and Australia range from 80% to 125%, with Australian’s being the highest.

For the rising cost of tomatoes, fuel or lettuce…..hiking rates too aggressively would ‘crucify’ the indebted households in the developed world and more importantly (for some, many or government) it would stifle their largest asset class………residential real estate.

August 27, 2022

by Rob Zdravevski

Crude Oil leads

Moves in Crude Oil seems to lead the next move in Australian inflation and the Australian 2 year bond yield.

August 17, 2022

by Rob Zdravevski

China’s climate policy in disguise

I heard of import tariffs but not export tariffs

Is exporting inflation, China’s new ‘weapon’?

Maybe this is part of China’s net zero emission plan?

Would you like to know why HRC (hot rolled coil steel) prices have quadrupled in the past year?

The world’s largest steel producing nation has been imposing and increasing tariffs on its own steel exports.

I’ll repeat, Chinese companies are required to pay a tariff in order to export their product.

High purity Pig Iron exports attract a 20% tariff while Ferrochrome stands at 40%.
Furthermore, China has removed export tax rebates for 23 steel products including flat and rolled steel)

This is quite incredible. 

It is quite normal for nations to impose a tariff on goods being imported onto their shores and limit ‘product dumping’ but to ‘discourage’ your own corporations from global competition and profits is an extraordinary tactic.

In 2020, total world crude steel production was 1877.5 million tonnes (Mt). The biggest steel producing country is currently China, which accounted for 57% of world steel production in 2020.

The next 6 countries (regions) account for a combined 28.4%. 

They are:
#1 EU  7.4%
#2 India  5.3%
#3  Japan  4.4%
#4 U.S. 3.9%
#5 Russia  3.8%
#6  South Korea  3.6%
#29 Australia 0.3%

Australia’s annual steel production is 5.5Mt, ranking behind the production of Bangladesh, Austria, Malaysia and Belgium.

One-third of Australia’s steel needs (nearly 2Mt) are imported, with most it coming from China. The rest is supplied by local manufacturers such as Bluescope Steel.

So, the news becomes even more alarming when the amount of steel imported from China has fallen by 50% in the past several months.

Can you see how half of 2Mt is a pittance of China’s 1,065Mt worth of annual production yet it has a pronounced effect on Australian business.

But what is China export tariff strategy telling us?

Firstly, China is ‘ring-fencing’ some its industrial production perhaps its seen as a form of ’nationalism’ but more so, I see it as securing or better yet, retaining its supply for its own consumption.

This could also be a measure of protectionism, but this is not new because western economies already do it themselves.

When you have a powerful (and enviable) position such global ‘market share’, you can withhold supply, causing localised prices to rise, thus hurting industry and consumers in far away locales.

Whilst imposing tariffs of steel exports will accentuate output gaps in all those other nations and higher prices may remain, by sacrificing some capitalist profits, this may be one aspect how China will reduce its carbon emissions…….

Have a think about that notion?

In addition, after decades of the global juxtaposition of China exporting deflation (and many enjoying lower prices), China may be now “exporting” inflation. 

It may be the definition of being ‘careful what you wish for’.

With its own currency testing multi-year highs (helping put a lid on its own inflation rate), could China’s new export to the world actually become Stagflation?

Don’t forget to subscribe to my blog to receive other notes, the moment they are published or equally feel free to email with a question or comment.

Until next time,

Warm Regards,
Rob Zdravevski

Shipping costs are adding to inflation

The Baltic Dry (shipping) Index has risen 10x over the past 15 months.

So the decision for businesses is that the cost of shipping is passed on into the finished product pricing or the bulk product isn’t transported (due to an aversion to higher shipping costs), resulting in scarcity.

Either way, prices rise…..and yet I’m told there isn’t any inflation.

August 22, 2021
by Rob Zdravevski

The FED can’t manufacture inflation

Let’s get one thing straight….
The Federal Reserve is hopeless at trying to produce inflation.

It’s had bandied about some fantastical 2% inflation target for years. M2 Money Supply has risen by $6 trillion in 5 years, with half of that occurring in the past 3 months (and more to come) and still isn’t any sign of inflation.

It’s advisable to read up on Debt Deflation. That seems a more probable outcome.

Having said that, inflation could well rear its head as a result of something such an oil shock. Incidentally, the energy complex has a significant weighting when calculating inflation.

I don’t say this because I’ve recently re-read the events of 1970’s but there is some merit of that occurring within the current landscape.

But the Federal Reserve won’t be the ones who “create” inflation.

June 17, 2020
by Rob Zdravevski

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