I believe inflation has peaked – and here is the data

by ini0n

TLDR: I believe inflation has peaked and will come down fairly quickly. I’ve put together all the data – the points that agree and disagree with that hypothesis so you can make up your own mind.

If we’ve already seen the worst of inflation, the Fed will relax and a hard recession can be avoided. Stocks and bonds will perform well, particularly what has most been affected by the high inflation environment.

Oil

Oil production is steadily returning to pre-COVID levels. Prices have declined with the China lockdown, global slowdown (particularly in Europe), and release of the strategic petroleum reserves. There was fear with the Ukraine war, but the oil does seem to be slipping out to India/China which frees up global supply.

Given China looks to be only gradually opening back up, Saudi Araba has committed to production increases, Chevron’s deal with Venezuela and current prices making fracking more attractive – I think we should get away with this one.

Electric cars are already reducing the oil demand by 1.5 million barrels per day. Increasing fuel efficiency and a stagnant China long-term point to downward pressure on oil prices.

Oil price

Oil Production in millions of barrels per day

Materials, Food, Shipping

Food costs, material costs and container costs have all come down. Inflation-adjusted they’re close to historic trends. While they were particularly affected by supply chain shortages and the Ukraine war; other less impacted commodities like copper and milk have remained steady. They don’t point to runaway inflation, with demand outstripping supply.

Stagnant China with lower GDP growth and popped real estate bubble should free supply of materials like iron ore and copper. India will probably be the next major demand driver.

Wheat price

Iron ore price

Lumber price

Global container rate

Wages & Earnings

Ultimately for more inflation, you need more demand than supply. People need to earn more to spend it (absent debt which I’ll talk about next).

Wages and earnings growth are only a few percentage points above historic trends and do seem to be falling. This means excluding supply chains and debt, inflation should be sitting a few percentage points above trend (4-5%) vs. the 8% it currently is.

US wage & salary YOY growth

US hourly earnings YOY growth

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Household Debt

Debt is where team inflation has a point. It’s accelerating. Consumption demand can come from debt instead of earnings, which leads to bubble pops like in 2008.

While you’d assume higher rates would lead to lower debt, as long as borrowing costs sit below inflation you’re actually getting paid to borrow. If I borrow at 6% when inflations at 9% then my debt gets 3% lower each year in my ability to pay it off.

I think lower input costs and wage deacceleration will happen fast enough to bring inflation down to where borrowing costs are above inflation. That should nix this bubble.

Total US household debt

Total US outstanding credit card balance

US personal saving rate

Fed Balance Sheet

The fed has run down the balance sheet by $300b, still small compared to the trillions they printed but they’re making progress.

Fed balance sheet

Reverse Repos

Reverse repos are where the government takes banks’ excess cash off their hands for a day. It only happens when there’s so much excess cash sloshing around the system that banks can’t find anyone worthy of lending to.

This shot up to over $2 trillion, which is crazy. But does gradually seem to be easing as of recently. We’ll see if this trend continues as the fed pulls more cash out of the system.

Overnight reverse repos

LIBOR/SOFR Rate

LIBOR is the interbank rate for how much banks will lend to each other. It’s essentially the safest loan a bank can give, particularly the overnight rate. So if you see it spiking it’s an upcoming sign of turmoil. For example, it started spiking years before the 2008 crash, indicating a liquidity crunch.

It has been increasing, but in real terms with inflation at 8% it’s flat. The Fed is paying a record reverse repo rate of 2.7% due to inflation which puts a floor on this. Not overly concerned but keep an eye out, it should come down with inflation. If not, probably be a recession.

US LIBOR 3 month rate

US secured overnight financing rate (replaced LIBOR)

So there you have it, let me know what your thoughts are on inflation and anything I’ve missed.

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