In our last post we noted that the inflation numbers for October reported last week were lower than the previous month. JP Morgan, one of the Portfolio Strategists we utilize for client accounts, said the following about what is behind this inflation data in their Weekly Market Recap this week…
After peaking at 9.1% year over year in June, inflation has slowly been receding. The October CPI report confirmed this trajectory as headline CPI surprised to the downside at 7.7% year over year – its smallest year over year increase since January. Core CPI also moderated to 6.3% y/y, down from6.6% year over year in September.
We are seeing gathering evidence of disinflationary forces at play, the most notable being a cooling economy and improving supply chains. First, the Fed’s aggressive rate hikes appear to be working and October’s CPI report should give the Fed confidence to slow to 50 bps in December. Second, easing supply chains are acting as disinflationary tailwinds for core goods. The Global PMI suppliers’ delivery time index has returned to its pre-covid normal 1) inventories have matched up more evenly with demand and 2) demand has cooled modestly due to higher rates. Global PMI input and output prices have also moderated, down 7.7 points and 8.1 points from their springtime peaks respectively. Beyond PMIs, port congestion has also improved. In January 2022, there were 100+ ships waiting to get into the Port of Los Angeles. Now, it hovers below 10 – a welcome sign of collapsing bottlenecks. As illustrated in the chart, the October 2021 peak in delivery times preceded the February 2022 peak in core goods inflation. As such, further improvements in supply chains should continue to act as a dampener on core goods inflation, albeit on a lag. In October, core goods inflation came in at 5.1% year over year, down from 6.7% year over year in September and its smallest year over year increase since April 2021. We expect this trend to continue as supply chains retreat to status quo. While inflation is finally moving away from its firmest period, risks for Fed overtightening still linger. Against this backdrop, investors should continue remaining defensive with well diversified portfolios at this time.
