Taps Coogan – September 20th, 2023

We’ve repeatedly made the case over the past year-and a half that the leading indicators of inflation have been pointing to falling inflation and, while it may not feel like it, between July 2022 to July 2023 we actually witnessed the third fastest decline in headline CPI since at least the 1950s and the fastest drop outside a severe recession.

Nonetheless, over the last number of months, we’ve noted that the near-term case for further ‘rapid’ declines in headline inflation was weakening: the impact of large year-over-year declines in commodities is fading and the contraction in PMIs may actually be reversing.

That puts us at a crossroads of sorts.

Structurally, our demographics and debt levels are the opposite of the 1970s and remain highly deflationary. Nonetheless, our cautious bullishness on oil prices is increasingly being proven out and makes the case for further near-term declines in headline CPI mathematically quite tough.

We assume that inflation is now ‘stuck’ above 3% until economic activity slows more significantly and that the ‘quickness’ of any economic slowing is likely to happen in proportion to the quickness of any rise in oil prices, which we now see as the single most important determinant to inflation and the probability of recession.