Not all price pressures are easing

There have been growing signs that we are at the turning point in global inflation. Commodity prices and shipping costs are down both in y/y and level terms, while product shortages have alleviated as softer demand and fewer bottlenecks have opened up spare capacity. And, in the past week, we received the US CPI print for July, which showed that headline inflation there fell by more than the consensus expected. However, central banks won’t take too much comfort from all this just yet. While headline inflation is set to fall sharply in the year ahead, red-hot labour markets and elevated inflation expectations mean that underlying sources of inflation remain intact. Slowing economic growth and tighter monetary policy should help resolve this problem. In fact, the past month’s data showed that activity is already bending under the weight of higher interest rates and multi-decade-high inflation. But it is still far too early to be confident that inflation will settle around target rates in two years’ time. So, our sense is that investors have gone a bit too far in anticipating a major shift in – particularly Fed – policy in the next 6-12 months.