Will inflation ever cool?
Whatever you think caused all this hot inflation, stealthy signs signal it may have crested – bringing huge relief that should help the TSX and global stocks. Let me show you by comparing input costs with final inflation.
Take energy, a necessary input. Raw fossil fuel prices play a later huge role in heating, cooling, transportation and manufacturing inflation. Oil and natural gas prices boosted Canada’s Consumer Price Index all year – far more so for “headline inflation.” Yes, Canadian gasoline prices still stab you. But October’s average was 17.2 per cent lower than June’s peak. Why? Global oil prices are down more than 30 per cent from March’s high. Globally, euro zone energy prices contributed over a third of the bloc’s 10.6 per cent year-over-year October CPI increase – on fears of winter natural gas shortages and nuclear power outages. But gas storage filled far faster than had been feared. Shuttered French nuclear plants will return online soon. European natural gas prices, still elevated, fell sharply from August highs. New import terminals come online in December and January and additional U.S. shipments await. As raw fossil fuel input costs fall, it deducts from future inflation.
Food? Vladimir Putin’s invasion of Ukraine spiked global wheat and grain prices, partly underpinning Canada’s painful 10.1 per cent year-over-year food price rise. But improvement approaches. U.S. wheat is down 36.8 per cent, in U.S. dollars, from March highs. A basket of Canadian crop prices fell 15.4 per cent since May’s peak. The United Nation’s World Food Price Index, down for seven straight months, sits 14.9 per cent below March’s high.
Few of these improvements show yet in stores or CPI data. Consider housing. Canadian home prices are down 10 per cent from February’s peak. European and U.S. price increases have slowed. Home prices routinely lead rents – similar moves are coming soon in that market.
For businesses, S&P Global’s Manufacturing Purchasing Managers’ Index (PMI) showed Canadian firms hiking prices amid the weakening loonie – a short-term move. More crucially, input costs rose at the slowest pace in 23 months, barely outpacing long-run trends. The Ivey Business School’s economywide PMI showed elevated input prices, but far below January’s highs. U.S. October manufacturing PMIs revealed faster delivery times and slowing inventory growth. Input prices declined. More relief approaching.
On supply chains, Shanghai freight rates average a quarter of January’s high (in U.S. dollars). The Baltic Dry Index of maritime freight rates has plunged 77.7 per cent since October, 2021. Its decline often sparks recession warnings. Maybe a recession is coming – or not. But supply chain improvements absolutely help future inflation.
Pessimists echo Bank of Canada Governor Tiff Macklem, foolishly believing tight labour markets such as Canada’s augur higher wages and further inflation. They miss U.S. Nobel laureate Milton Friedman’s learned truth of the 1960s: Wages always follow prices – never the reverse. Regardless, Canadian wage growth slowed since the big jumps of May and June. U.S. payroll gains in the six months through October were 65 per cent that of the prior six months.
Do you believe central banks’ ballooning money supply stoked inflation? Global M2 growth – measuring currency in circulation, deposit accounts and money funds – soared to 23 per cent year-over-year in late 2020. But it sank to 7.2 per cent by this June, matching pre-COVID norms. Canadian M3, a slightly broader gauge, peaked in June, 2020, at 16.3 per cent. It has nearly halved to 8.3 per cent (based on September, the latest available number). US M4 – the broadest measure of money supply that adds in cash-like securities – hit 30.9 per cent in June, 2020. It crawled at 1.9 per cent in September.
This isn’t about central bankers’ silly rate-o-rama. Monetary decisions usually hit economies at a lag, influencing lending via tweaks to banks’ overnight borrowing costs. But global banks’ currently enormous, low-cost deposit base means they can skip all that to lend. Proof? While the Bank of Canada hiked its policy rate 3.5 percentage points this year, lending sped up. September lending grew 9.4 per cent year-over-year, nearly tripling the reading of 3.5 per cent in September, 2021. The Federal Reserve hiked comparable U.S. rates by 3.75 percentage points in 2022 – yet lending growth accelerated from January’s 4.3 per cent year-over-year to October’s 12 per cent. That doesn’t ease inflation. But it shows recent improvements aren’t about interest rates.
Inflation’s peak can only be certain in hindsight. But most of these steadily improving input costs aren’t reflected in CPI data yet. Today’s inflation is like a snake that just ate a huge rodent. There is a bulge its midst – until the snake digests it, one vertebra at a time. The world ate a lot of input inflation in 2020 and 2021. Digesting the bulge – now under way – will be a major relief, turbocharging stocks and bonds globally.
Ken Fisher is founder, executive chairman and co-chief investment officer of Fisher Investments.
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