Will Inflation Pressure Ease in the 3rd Q & 4th Q of 2022?

[Parsad]

Oil prices flattening...metal prices cratering...commodities flattening or dropping...inventory levels getting higher and higher...some companies starting to layoff...  

 

Countered by:

 

Supply chain backlogs...high price for distribution (shipping, gas, diesel)...continued crisis in Ukraine...lack of workers...likely increases of prices at retail level in Q3...expected 50 basis point hikes in July and September...

 

Is inflation going to start to ease up in 3rd and 4th Quarters of 2022?

 

I suspect some deflationary pressure in some areas where inventory levels will be too high before Christmas:

 

https://www.cnn.com/2022/06/26/business/retail-returns/index.html

 

Cheers!

[Parsad]

On the other end, airline ticket prices can only go up...staffing shortages, 2019 demand, traffic control shortages, fuel costs, food costs, labor costs...I own a bunch of HA Jan 2023 call options, but I may have been early.  I imagine airline profits will be close to 2019 in 2022 and exceed 2019 in 2023...investors should consider Jan 2024 call options on many airlines.  Cheers!

 

https://www.cnn.com/2022/06/26/business/flight-cancellations-sunday/index.html

[Gregmal]

I actually think airlines are a great hedge here. I laid it out a while ago. But basically all the inflation inputs, like energy and labor plus rising rates, effect airlines more than anything. Something like AAL, which has a boat load of debt coming due on 2025? Puts are 2-3x the basis already, and if it works out they’re 10-20x. If those same inputs ease, a lot of other stuff soars. 

[Viking]

I voted yes, inflation will start to come down. Why? I expect global economic growth will continue to slow in 2H (it is already happening). Now my guess is also that we see inflation come down only a little - from +8% to 6%. So still a big problem. And where inflation goes from there will depend on the Fed. My guess is they capitulate (and pivot). And that, of course, will likely result in inflation picking up again later in 2023. Bottom line, i think inflation likely remains uncomfortably high for years (with low interest rates). Financial repression like the late 1940’s - that is how you solve a too much debt problem. Which might actually be the Feds end game.

Edited June 27, 2022 by Viking

[Ulti]

https://allstarcharts.com/a-double-whammy-for-cyclical-assets/

[50centdollars]

If governments start doing this, I'm not sure how inflation comes down.

 

https://www.ijpr.org/economy-and-finance/2022-06-26/california-tax-relief-whats-in-the-tentative-deal

[Paarslaars]

Seems California does not understand how inflation works. 

 

Personally I'm betting inflation stays. Looking into buying a new house on a much bigger (fixed) mortgage, letting inflation wipe it out.

[Spekulatius]

I think inflation pressure will ease but the character of inflation will change from commodity/energy driven to wage driven. If we do get from 8% inflation driven by commodities/shortages to 6% inflation riven by wages, inflation will be very sticky and very hard to reverse.

 

it's not a given, but it's a substantial risk.

Edited June 27, 2022 by Spekulatius

[FCharlie]

10 hours ago, Viking said:

I voted yes, inflation will start to come down. Why? I expect global economic growth will continue to slow in 2H (it is already happening). Now my guess is also that we see inflation come down only a little - from +8% to 6%. So still a big problem. And where inflation goes from there will depend on the Fed. My guess is they capitulate (and pivot). And that, of course, will likely result in inflation picking up again later in 2023. Bottom line, i think inflation likely remains uncomfortably high for years (with low interest rates). Financial repression like the late 1940’s - that is how you solve a too much debt problem. Which might actually be the Feds end game.

I very much agree with you Viking. I think the long-term plan is financial repression, even if the short-term plan is to kinda sorta fight inflation. Nominal GDP grew by 6.5% in Q1 even though the headline number says GDP contracted 1.5%. The Fed needs nominal GDP to grow faster than federal debt grows, which means they need consistent, elevated inflation and they also need to avoid a severe recession which would crush tax receipts, increase deficits, and drive debt/GDP even higher. We're probably not that far off from a technical recession and/or a Fed pivot/pause at interest rates that are still below the rate of inflation. If they pause, I'm not sure what happens. If they actually go back to QE, or "Not QE", I think it's look out above for gold and real estate prices.

 

It's worth noting that nominal GDP grew from $1 trillion to $2.7 trillion throughout the 1970s in spite of the multiple recessions that took place during that decade, and debt as a percentage of GDP actually declined during that time to just 30%, which was a level that was low enough that it allowed the Fed to genuinely attack inflation. 

[Spekulatius]

Inflation is how a sovereign is supposed to default on their debt.

[changegonnacome]

I think supply chain, commodities inflation moderates and feeds through to CPI in Q3/4.........but that will only go so far maybe taking CPI down from 8% to a 5/6 handle and this will be the head fake I suspect later this year where folks suspect where conclude that what the Fed is doing is 'working'........the only issue is that inflation in the US is both supply side inflation mixed with old style monetary inflation.......monetary inflation is more stubborn to remove from the economy & will require the Fed to resume a rate hike cycle in early 2023 (if indeed they pause later this year in response to some supply side easing).

 

You cant forget that with CPI @ 8% and Fed Funds @ 1.75% going to say 3.5% by YE.....where inflation, IMO, will come down but still be stubbornly high at 5+%......the Fed in that scenario will STILL be running a classically accommodative monetary regime in an inflationary environment.......big question is further out the curve whether QT / bond dynamics do what the Fed isnt on the short end.

Edited June 27, 2022 by changegonnacome

[Xerxes]

Great thread. 
 

Are we talking level of inflation or rate of inflation. Market seem to track the rate of inflation … the famed y-o-y %.
 

Just like when it came to Covid-beneficiaries stocks, it reacted to their rate of change, to pre-Covid quarters. 
 

For what it is worth, the math will see to it, that the y-o-y rate declines once we start lapping in 2023 the 2022 data. 
 

question, how early the “market” will smell that 

[Viking]

Where this discussion gets really interesting is if we get a recession around Nov and oil goes back to $60. You could see inflation drop dramatically. The Fed would be able to pivot. Or we could get that same recession around Nov and oil could go to $150 (due to geopolitical situation). This would keep inflation high and likely prevent a Fed pivot. 
 

So the range out possible outcomes really are quite large. And the impact on financial markets will vary depending on how things play out. Keep the popcorn coming… the movie is not nearly over yet.

—————

For most investors probably 70% of total returns is likely driven by successfully anticipating/negotiating Fed policy. Capitalism 2.0. This has been true since 2008. 

[Sweet]

It’s very unlikely oil goes back to $60 in the short term.

 

The deficit appears to be quite large.

 

Even factoring in a recession, some pundits continue to see oil drawing.

 

However I agree with the premise that if energy drops so will inflation a lot.

 

 

Edited June 27, 2022 by Sweet

[Gregmal]

Wait, is that wheat back at February prices? 

[matthew2129]

I wouldn't be at all surprised to see YoY inflation drop below 2% by May 2023

[stockman500]

1 hour ago, matthew2129 said:

I wouldn't be at all surprised to see YoY inflation drop below 2% by May 2023

ngl seems really bullish 

[scorpioncapital]

is the thesis here that low inflation suddenly makes all stocks more valuable again (or, to be less politically correct, overvalued again)?

If inflation averages 4% instead of 2% for years and years, I would imagine p/e multiples will not get so out of hand, and may even be subdued, putting a ceiling on prices that have been very high for the last 20 years

[Spekulatius]

14 hours ago, Sweet said:

It’s very unlikely oil goes back to $60 in the short term.

 

The deficit appears to be quite large.

 

Even factoring in a recession, some pundits continue to see oil drawing.

 

However I agree with the premise that if energy drops so will inflation a lot.

 

 

There is no deficit. Supply equals demand , it's just a matter of price.

[Sweet]

47 minutes ago, Spekulatius said:

There is no deficit. Supply equals demand , it's just a matter of price.

I heard this before but it’s not accurate.  There is a deficit.  If there was no deficit inventories would not be falling.

 

Supply and production are different and either one can be in a deficit.

 

The current deficit is in oil production, not the supply of oil to the market.  
 

There is enough supply only because there are large strategic and commercial oil inventories that are being drained.

 

But there is not enough oil production to keep oil inventory levels steady.

 

 

[mcliu]

39 minutes ago, Sweet said:

I heard this before but it’s not accurate.  There is a deficit.  If there was no deficit inventories would not be falling.

 

Supply and production are different and either one can be in a deficit.

 

The current deficit is in oil production, not the supply of oil to the market.  
 

There is enough supply only because there are large strategic and commercial oil inventories that are being drained.

 

But there is not enough oil production to keep oil inventory levels steady.

 

 

FYI:

 

 

 

 

[SharperDingaan]

You might also want to keep in mind the type of oil ...

There is a material US deficit in sour crude that is being met out of SPR releases, and on some occasions the entire SPR release is sour crude. The remaining SPR sour crude inventory is estimated to be < 240,000 (very low), net of minimum balances to maintain the structural integrity of the salt caverns themselves. Lot of folks starting to look for available Q4 railcars, sending WCS south and returning north with dilbit  https://en.wikipedia.org/wiki/Dilbit

 

SD

[changegonnacome]

Burry today tweeting about 'bullwhip' effect of bloated inventories that is akin to the disinflation head fake I expect in the next couple of quarters driven by two elements (1) this bullwhip effect but then (2) genuine easing around supply chains in China etc. etc......the supply side inflation will indeed turn out to be transitory just glacially slower than that word suggests........what wont pass so easily, IMO, is the monetary inflation unleashed in 2020/21 and still circulating in the system (deficit spending/cash out refis/QE in 2020/21) which will remain stubbornly higher inlfation than the Fed's target & will require further rate hikes after a brief head fake pause later this year.

Edited June 28, 2022 by changegonnacome

[Ulti]

[changegonnacome]

2 hours ago, Ulti said:

 

Do you have any more information on the Y axis.....it says index/tighter financial conditions.......index of what? - Ok 'financial conditions'....what financial conditions data is used to build the index? Just curious.