- Increasing retail inventories and waning consumer sentiment suggest that inflation could already have peaked.
- Investors ought to be prepared that even though inflation may have peaked, central bankers tend to act posthumously and may keep on raising interest rates even after it no longer makes sense to do so and with the economy already in recession.
Walk into any supermarket and whether it’s the price of chicken or chickpeas, it’s hard not to notice that the same fistful of dollars buys increasingly less of anything these days.
Like a cancer, inflation is quietly eating away at incomes but could it already have peaked?
There is no shortage of economists who argue that supply shocks and blockages could soon ease, and energy costs stabilize and are warning that excessive tightening by central bankers could spark a recession even as price pressures are peaking.
In 2011, the European Central Bank raised rates only to walk them back later that same year, while the Bank of Japan did the same in 2006.
More recently, the U.S. Federal Reserve tried to hike borrowing costs in 2018, only to have to walk that back soon after the markets started to cave under the pressure.
And there is some actual evidence that peak price pressures may be passing – inventories are building up.
Against the backdrop of supply shortages last year, many companies filled out warehouses, including Amazon, only to see demand normalize this year and be stuffed with overstock.
Consumers are growing more cautious as interest rates rise and that overhang of goods will eventually add downward pressure on prices.
According to data compiled by Bloomberg and based reported earnings in late May, inventories for companies on S&P consumer indexes with a market value of at least US$1 billion saw inventories rise by 26% to a whopping US$44.8 billion.
Sectors such as consumer discretionary and technology goods are at real risk of an inventory glut, even as the economic outlook appears increasingly uncertain.
And then there’s the price of housing, with growth appearing to have peaked.
According to the Bank of International Settlements, global growth in real house prices in rich countries slowed to 4.6% annually in the final quarter of 2021, down from 5.4% in the third quarter of 2021.
With interest rates set to rise, the repayment burden on those who have borrowed to fund their homes will increase and with global housing prices some 27% higher than immediately after the 2008 Financial Crisis, there’s plenty of room for correction.
And finally, the elephant in the global economy, China, could see a deflationary shock for demand across the global economy, which is likely to show up in commodity prices.
As the rest of the world cools in its demand for more goods out of China, an already moribund economy will add to supply excesses and scale back demand for everything from industrial metals to agricultural products and energy.
Calculations by Bloomberg Economics suggests that as little as a 1% slowdown in Chinese industrial production could shave as much as 5% off global oil prices.
Will that necessarily change the course of central banks though?
Unlikely.
Policymakers tend to act posthumously and not pre-emptively.
The time to have raised rates was well in the middle of last year, as was the period for tightening.
With a war in Ukraine and souring consumer sentiment, raising rates now would risk recession, but central bankers appear determined to run that gauntlet which will necessarily fuel volatility and increase the risk of sharp market corrections for risk assets.
