Inflation to fall dramatically?

peemac

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I'm an anorak when it comes to commodities - I blame the movie Trading Places and the Florida Orange Juice futures.

In the last few weeks a huge raft of commodity prices have been gradually falling and the cumulative drops have been quite substantial on some

Wheat, Butter, Soy, Coffee, Cheese, Natural Gas, Coal, Lumber, Rapeseed oil, Palm oil and even Butter! They are all futures, so probably take a 3-4 months to feed into pricing, but it has been a consistent drop and a substantial drop. Refining margins for fuels, especially diesel, have also fallen substantially and will feed into pumps quite quickly all around Europe.

Then add in a weakening dollar (finally) with some banks saying the Euro has turned bullish.

If this starts to put the brakes on factory input costs, you could see the ECB and the Fed pull back on interest rate hikes as inflation forecasts will be quite different to what they currently are.

But the best news is we can possibly look forward to Kerrygold being back under €3.50 in the spring :p
 
Does that not mean that the interest rate rises have worked and that we are heading into a global recession?
 
Does that not mean that the interest rate rises have worked and that we are heading into a global recession?
I think there's more to it than that, but its certainly a factor and the fear factor of further increases may also be in play.

The shock of the Ukraine war was the cause of many increases especially in fuel/energy (including Coal) and some foodstuffs such as wheat. Most of the world worked together to change fuel supply routes and the reliance on Russian fuel is all but gone at this point with the milder weather around Europe also assisting. Even the 2023/24 winter market predictions of gas returning to $300 have dissipated.

Its the fairly sudden and fairly substantial drop and the fact that its across the board that is surprising as very few were predicting such changes just a few weeks ago.

If the drops are sustained into the end of the year, I think the rhetoric from the central banks will change and that bodes well for mortgage rates.
 
I think there's more to it than that, but its certainly a factor and the fear factor of further increases may also be in play.

The shock of the Ukraine war was the cause of many increases especially in fuel/energy (including Coal) and some foodstuffs such as wheat. Most of the world worked together to change fuel supply routes and the reliance on Russian fuel is all but gone at this point with the milder weather around Europe also assisting. Even the 2023/24 winter market predictions of gas returning to $300 have dissipated.

Its the fairly sudden and fairly substantial drop and the fact that its across the board that is surprising as very few were predicting such changes just a few weeks ago.

If the drops are sustained into the end of the year, I think the rhetoric from the central banks will change and that bodes well for mortgage rates.
Yes, the 7.7% October inflation rate in the US rather than the predicted 8% has had a significant impact on sentiment, with the expectation that the 0.75% December FED interest rate rise that is baked into the market won't happen.
 
Inflation will, inevitably, fall. Though prices will not, necessarily, fall.
Inflation is comparing the price of something now, to the price of something 12 months ago.
Once the anniversary of the Ukraine war is reached, then inflation will compare the price of things in March/April of 2022 to the price of things in 2023. It was always going to fall, using that calculation.
The interest rate rises were a brainless reaction, caused by brainless economists.

If prices do fall, it will be because of a massive slump in demand, caused by a totally unnecessary recession, engineered by braindead central bankers.
 
Yes, the 7.7% October inflation rate in the US rather than the predicted 8% has had a significant impact on sentiment, with the expectation that the 0.75% December FED interest rate rise that is baked into the market won't happen.
The October inflation report also showed that month-on-month inflation is slowing significantly in the US. This should mean that the base effect will erode away a lot of inflation as well.
 
I think inflation is with us for a good while yet ,we have had 40 years of very low inflation and ultra low interest rates for the last decade, in the 1970s inflation was there for the guts of a decade.

As for energy and commodities they had their worst decade upto 2020, then covid exasperated everything driving oil prices briefly negative. Because of this there has been little investment in this area and commodity companies are just running down their reserves and investing little in new capacity. Even in Ireland we have Eamon Ryan sitting on his hands and delaying issuing a licence to allow drilling to prove up an oil reserve off the coast of Cork
 
Inflation will, inevitably, fall. Though prices will not, necessarily, fall.
Inflation is comparing the price of something now, to the price of something 12 months ago.
Once the anniversary of the Ukraine war is reached, then inflation will compare the price of things in March/April of 2022 to the price of things in 2023. It was always going to fall, using that calculation.
The interest rate rises were a brainless reaction, caused by brainless economists.

If prices do fall, it will be because of a massive slump in demand, caused by a totally unnecessary recession, engineered by braindead central bankers.

Yes, but it may fall quite a bit quicker than they were forecasting just a few weeks back. That then would see interest rates rise less required and could then have effect of share prices and also see economies avoid recession or at least avoid any deep recession.

Latest prediction for Q4 2023 gas prices is $130-$150. 4 weeks ago they were giving a range of $250-$350. That alone would see a decent drop in electricity prices which has been a huge driver of inflation in the past few months.
 
Yes, but it may fall quite a bit quicker than they were forecasting just a few weeks back. That then would see interest rates rise less required and could then have effect of share prices and also see economies avoid recession or at least avoid any deep recession.
Global debt in the 70's was 100% of global GDP. Now it's 350%. A bit of inflation wouldn't do that any harm.
 
A lot of commodities (especially food) trails the price of fuels. Natural gas is the primary ingredient for fertiliser and oil is needed for cultivation and pesticides. It gets worse for most animal sourced foods as they are fed grains, so the cost of inflation for the livestock farmer is higher again.

However what is driving food prices is not just the shock of the war. Grain prices are still quite high because one of the worlds grain/oilcrop baskets is out of commission (it usually supplies 1/3 of Europe's livestock feed....). This is noticeable as EU level milk production is back significantly 5-10% even as EU farmers are driving up the price of crops to feed their livestock. Weather instability in South Asia and Oceania has also not helped as grain production due to flooding has been hampered. All of this is making feeding livestock quite expensive.

I do not forsee food (especially animal sourced food) getting noticeably cheaper anytime soon. Good news for Ireland's pasture based production; bad for all consumers.
 
Then there is the issue of reducing fertiliser use through organic farming, production of biofuel , planting large areas with trees again and even solar farms taking acres away from food production.

All this points to alot less food being produced, much higher prices and this causing inflation to stay around for a long time. As was pointed out above the full effect of increased cost of food production has still not made it onto the shop shelves
 
Then there is the issue of reducing fertiliser use through organic farming, production of biofuel , planting large areas with trees again and even solar farms taking acres away from food production.
If it was up to me I'd ban most biofuels as they have a minimal impact on CO2 and can have a serious environmental and ecoiogical impact.

The only solution is to eat less meat. I'm not a fan of the idea on a personal level but there's no environmental argument against it.
All this points to alot less food being produced, much higher prices and this causing inflation to stay around for a long time. As was pointed out above the full effect of increased cost of food production has still not made it onto the shop shelves
It's worth pointing out that there are more fat people than hungry people in the world so we already produce too much food, even for the 8 billion of us that there are now.
 
If prices do fall, it will be because of a massive slump in demand, caused by a totally unnecessary recession, engineered by braindead central bankers.
Inflation kills economies and nations. It is critical that it is controlled. If a manufactured recession is what is required to control it then it's a small price to pay.
 
Inflation kills economies and nations. It is critical that it is controlled. If a manufactured recession is what is required to control it then it's a small price to pay.

Of course, its a small price to pay if you're not the guy being turfed out of his home, or sacked, or left with a collapsing school, or an underfunded health service.
Was inflation caused by huge demand? By rapid wage rises? Was it caused by an excess of capital in the economy?
The answer to each of these questions is " No" It wasn't caused by any of these things, which raising interest rates is supposed to control
It was, almost exclusively, caused by external factors on the supply side.

Left alone, inflation would fall anyway. Because there is not a huge increase in demand, there is just a higher price for the essential stuff being purchased. If the supply side continues to cause inflation pressures, then interest rates won't make a bit of difference.
But what it will do , is increase poverty, increase mortgage defaults, increase business bankruptcy, reduce consumption, reduce investment, reduce purchasing power and deflate the economy.
 
Wages have risen below inflation, which has been pretty low, for the last 10 years. So, the capital, if it has expanded is not in the consumer's pocket. In fact, many people's wages are still, in actual terms, lower than they were in 2007/8. In terms of inflation adjustment they are significantly below those levels. The people who have the capital, don't spend it in Centra, or Dunnes Stores, or DID Electric, so they're definitely not causing this inflation
 
So either hike rates in response to a war-induced / QE-derived inflation, or take the gamble and let inflation run.

It may fall in response to falling input / fossil fuel costs on its own. It may become ingrained with wages chasing prices in a vicious circle. I don't think anyone can say with certainty what will happen.

There are no silver bullets, it's naïve to think that CBs don't understand the situation however. They did hold off raising rates (especially the ECB), even changing their methodologies to allow for it. They've ultimately though gone with rate hikes, which I would guess is what they believe is the lesser of two evils.
 
Wages have risen below inflation, which has been pretty low, for the last 10 years. So, the capital, if it has expanded is not in the consumer's pocket. In fact, many people's wages are still, in actual terms, lower than they were in 2007/8. In terms of inflation adjustment they are significantly below those levels. The people who have the capital, don't spend it in Centra, or Dunnes Stores, or DID Electric, so they're definitely not causing this inflation
All beside the point. Nobody's blaming consumers for inflation.
 
Inflation kills economies and nations. It is critical that it is controlled. If a manufactured recession is what is required to control it then it's a small price to pay.
Yes that's exactly what they are trying to do cause a recession to bring down inflation. That means jobs will be lost in the frothy sections of the economy like tech etc. That means that more people will have to go back to jobs they were doing before like in hospitality and construction . Of course the financial guys are never that explicit but that's the net result
 
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