Some more topsy-turvy markets this week. Super-sized rate hikes by Jay Powell sent the tech-heavy Nasdaq soaring on its best day in over two years. The ASX picked up some of the breeze and closed the week up 2.3%. Bad news is good news at the moment, but in brittle markets it wouldn’t take much for bad news to become bad news.
Is inflation peaking?
The release of the Consumer Price Index released on Wednesday was the most highly touted in years and has filled the once-dry work of the bureaucrats at the Australian Bureau of Statistics (ABS) with banter around office water coolers. It did not disappoint. At 6.1 percent, prices were rising at their fastest pace since Howard.
But in this understandable cloud of worry were hopeful signals that we may be reaching the top of the inflation wave.
Investors in financial markets certainly think so. Australian bond yields are falling as investors dive into fixed income in anticipation that central banks will get inflation back into its box, and maybe a recession, to boot. An instrument that measures the average amount of inflation US traders anticipate in the next five years approached its highest point in March and has since fallen 26%.
Staring at the 6.1 percent headline increase, there is plenty of reason to believe that financial markets have it right.
To begin with, a lot of prices slowed down. However, of the 11 broad categories the ABS monitors, the pace of seven categories actually slowed to what can be described as among the weakest readings in June 2022 and that includes the above mentioned food and housing categories that represent almost half the index. Big-ticket automotive fuel rose 4.2 percent in the June quarter, compared with 11 percent in the previous quarter.
The same is true in the nuance. Prices slowed in more than half the 119 subcategories, including eggs to newspapers. The trend is more stark in the ABS's seasonally-adjusted numbers, which remove the predictable patterns of the seasons. Inflation is high and going higher, but for now the trajectory in some areas of the economy appears to be moderating.
Idiosyncratic drivers of high prices persist. Tradable goods (like petrol) surged at twice the rate of non-tradables (like restaurant meals), because of the shortages and disruptions roiling international commerce. Prolonged flooding on the east coast drove up demand for fresh produce.
But while floods in Australia or factory shutdowns in China can set off supply-demand imbalances that support higher prices, they’re not in themselves sources of self-perpetuating increases. Floods subside and steelworks are working again.
Wheat prices, which hit bread and pasta prices, have fallen by about half from the peak shortly after Russia invaded Ukraine, and are back to pre-invasion levels. Other commodity prices have also fallen. Global shipping prices have dropped by about a third since last September.
Shocks are threatening if they cause people to predict, demand, and get higher wages that drive up prices and lead to a fresh round of wage hikes, the wage-price spiral of popular imagination. But wage growth is still moderate and a spiral is for now a “boomer fantasy.”
There was also upbeat news on the services front. Haircuts, doctor’s visits, cinema trips and the like make up about half the CPI basket yet account for only a fifth of the rises in prices. Of the 6.1 percent year-on-year inflation, “only” 1.3 percent was services. “If goods inflation took it back up to around that 1-3⁄4 percent level, it would mean that, overall, they would sort of be in their target band,” JP Morgan chief economist Ben Jarman said.
Depressed service prices are important for a couple of reasons. Services also tend to mirror local economic conditions more than goods, which are frequently manufactured abroad or from imported parts. The slower pace of price growth points to a more balanced supply and demand equation in Australia.
Last, inflation numbers will probably not capture much of the tightening undertaken by the Reserve Bank since April. It is worth remembering how only as recently as 4 May the cash rate went up and already, mortgage repayments are increasing while retail sales are declining and sentiment is in the toilet. But it will take months or years for these changes to wash through and show up in the CPI. Inflation information is like an old picture: a pleasant remembrance but you look nothing like that anymore.
What it all adds up to is that the Reserve Bank can afford to be patient. Big parts of today’s inflation are going to fade away, and there’s little sign of the type of wage-price spiral that might entrench it. Higher rates in Australia won’t help drain soggy lettuce fields, or reduce container freight costs.
Robust economic growth and the lowest unemployment since Whitlam obviously do deserve an interest rate that’s far above zero, but let’s not hurry to a job so rushed it crashes the economy.
Certainly Governor Philip Lowe and the Reserve Bank board must be kicking themselves for having left rates on hold for too long. Lowe has conceded his rate guidance was “embarrassing.” Fair enough. But hiking crazy fast on them simply adds up to looking silly again.
Read about what happened this week, as usual, and catch up on the rest.
Consumer shares slipped this week after Walmart issued its second profit warning of the year. Investors have good cause to worry that the same may happen here. Fair values for the mining sector are also headed lower for the first time this year, as globally traded commodities come under pressure.
The hammering at US technology giants such as Meta Platforms and Netflix was the prelude to this year’s bear market. Yet there are signs that a turnaround may be on the horizon.
Lastly, as money managers around the globe sift through the data for signs of capitulation, Ruth Saldanha explains what one of the all-powerful concepts actually means.
