So… how’s that deflation narrative looking?We’ve become so accustomed to headlines of ‘peak inflation’ and falling input prices that some have been throwing the wonderful ‘deflation’ word around. And we think most would enjoy a bit of deflation, as that would result in lower interest rates. However, with commodity prices (particularly oil) being a key driver of inflation, a lot of the softness can be tied back to the underperformance of commodities over the past 12 months. Supply chain disruptions have also been in the rear-view mirror and no longer a concern (or are they?)
Over 30,000 UPS workers are vowing to strike if a new pay deal is not negotiated by 1 August, which should throw a nice spanner in the works of the US (and global) parcel delivery system. Russia has pulled out of a key grain deal and is bombing Ukraine ports to derail trade in the Black Sea. And India has banned rice exports (apart from Basmati) to fight domestic inflation, adding to fears of another round of food inflation.
It is therefore worth noting that the Thomson Reuters CRB commodities index is seemingly breaking out of a 12-month retracement on the monthly chart. Furthermore, the retracement lasted 11 months before June’s small bullish candle, so the broad commodities index may have bottomed in May at -19.8% y/y. And assuming this is the breakout of a falling wedge, it projects a target around the 329.60 high. But if it were deemed a bull flag, the target sits around 365.
And what do we think will happen to consumer prices further down the track? Of course, they will begin to rise again. And the worrying fact is that inflation tends to come and go in waves, so if commodities continue to rally then it looks like the next wave of rising y/y inflation is pending.
