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Money Moves Markets

Ignore central bank hysteria: inflation risks are fading fast

September 21, 2022 by Simon Ward

Global six-month consumer price inflation peaked in June and fell further in August, reflecting pass-through of lower oil prices and a small decline in core momentum. Current commodity prices suggest a sizeable further drop into Q4 – see chart 1*. 

Chart 1

Chart 1 showing G7 + E7 Consumer Prices & Commodity Prices (% 6m)

Annual as well as six-month CPI inflation probably peaked in June, with the peak occurring within the expected time band following a major top in annual broad money growth in February 2021 – money trends lead inflation by two to three years, according to the monetarist rule of thumb. 

G7 annual broad money growth is estimated to have fallen further to below 4% in August, widening an undershoot of its 4.5% average in the five years before the pandemic – chart 2. The suggestion is that G7 inflation rates will be back at or below target around end-2024, if not before. 

Chart 2

Chart 2 showing G7 Consumer Prices & Broad Money (% yoy)

Markets were spooked by last week’s news of a hefty monthly rise in US core CPI in August but six-month momentum was little changed and below a June peak, while PPI pressures continue to ease – chart 3. 

Chart 3

Chart 3 showing US Consumer Producer Prices ex Food & Energy (% 6m annualised)

Central bankers are supposedly focused on preventing high inflation from becoming embedded in expectations. The view here has been that expectations were unlikely to become “unanchored” against a backdrop of weak money growth. The latest consumer surveys by the New York Fed and University of Michigan show longer-term inflation expectations back within 2010s ranges – chart 4. 

Chart 4

Chart 4 showing US Consumer Inflation Expectations New York Fed & University of Michigan Surveys, Medians

UK annual core CPI inflation made a marginal new high in August but money trends mirror the global picture and are signalling a 2023-24 collapse – chart 5. The latest Bank of England / Ipsos inflation attitudes survey, meanwhile, reported a fall in consumer longer-term inflation expectations, which have remained within the 2010s range – chart 6. 

Chart 5

Chart 5 showing UK Core Consumer / Retail Prices & Broad Money (% yoy)

Chart 6

Chart 6 showing UK Consumer Inflation Expectations Bank of England / Ipsos Inflation Attitudes Survey, Medians

The apparent anchoring of longer-term US / UK expectations suggests that wage pressures will dissipate rapidly as current inflation rates fall sharply in 2023. 

*The GSCI commodity price index uses US prices for the natural gas component; the series shown by the gold line in the chart incorporates an adjustment for European prices.

NS Partners Ltd.
September 21st, 2022