From M&G's Bond Vigilantes, November 16:
There is light at the end of the “inflation tunnel”, but we are not there yet!
The latest US inflation report came in softer than expected, with headline inflation now at 7.7% YoY and core inflation at 6.3% YoY. Inflationary pressures eased a touch as the deceleration in CPI was generally broad-based. Core goods inflation turned negative for the month while core services ex-rents inflation decelerated (this was partially due, however, to a technical change in insurance inflation). Rents generally remains elevated, but will likely soften going forward reflecting the current state of the housing market.
Overall the report was positive, reinforcing the idea that inflation has peaked and is starting to lower. However, it provided us with very little comfort as to where inflation is going to settle. While there is clearly some positive news on the inflation front, which will help inflation trend lower next year, there are still some negative factors which will likely prevent inflation from falling back to 2% anytime soon.
In today’s blog I want to highlight four pieces of good news around inflation and four pieces of bad news to keep an eye on in 2023.
Good news:
1. Money supply
The huge injection of money since the beginning of Covid is what caused inflation, but since then money supply growth (as measured by M2) has slowed down significantly and is now at a level consistent with 2% inflation.
Source: M&G, Bloomberg, 31 October 2022 (latest data available)
2. Rents
Rents are key in forecasting US inflation as they represent a big part of the index (c. 30% for headline CPI and c. 40% for core CPI). Rents have been rising for most of the year, helping push inflation higher, but we now might be close to a turning point. Rents in the CPI index is usually a lagging indicator, due to the way it is constructed (for example, data for official rents is collected only twice per year in order to capture a larger sample). There are, however, more timely – albeit arguably less accurate – rents indicators and they all are suggesting a slowdown in rents growth. This slowdown will likely start to be reflected in official measures too over the next few months.
Source: M&G, Bloomberg, 31 October 2022 (latest data available)
3. Dollar
The US dollar has been rising sharply this year and this has impacted and will continue to impact inflation, particularly goods inflation. As most of goods are imported, a strong US dollar will likely results in lower goods prices....
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