Peak inflation? Why some prices fall quickly


Wood prices have fallen in recent weeks.JENNIFER GAUTHIER/The Globe and Mail

As inflation rates around the world rise into decades, some of the biggest drivers of consumer price growth have entered a new and welcome phase: their prices are actually falling.

Crude oil, wheat and timber are some of the commodities that have fallen in recent weeks. Shipping rates on major trade routes are falling from record highs. And used car prices, which have risen over the past two years, are showing early signs of a decline.

In addition, bond investors’ inflation expectations are also falling, suggesting Wall Street is becoming increasingly optimistic that skyrocketing consumer price increases will result.

It is an encouraging development for central bankers as they tackle the biggest inflation threat in decades with rapid interest rate hikes. At the same time, it would be premature to say that inflation is peaking, several financial analysts say, let alone that central bankers should hold back on further rate hikes.

Inflation remains uncomfortably high in major economies, with Canada’s annual rate reaching 7.7 percent in May — the highest in nearly 40 years. Sharp price increases extend to more products and services, while businesses and consumers’ short-term expectations of inflation – a key determinant of price setting and wage negotiation – are also rising.

In the next phase of the battle, financial analysts expect the Bank of Canada to raise its key rate by three-quarters of a percentage point next week, from the current 1.5 percent to 2.25 percent.

The central bank and its global competitors are raising interest rates to curb demand in the economy, but hope to achieve a “soft landing” that will contain inflation and avoid a recession. However, fears of a recession have gripped global markets in recent weeks as investors bet that consumer demand will weaken significantly in response to higher interest rates – hence falling prices for key commodities.

“There’s no denying that some of the things that used to drive inflation are less so,” said Eric Lascelles, chief economist at RBC Global Asset Management. He added: “I must confess, I am in the camp that thinks a complete taming of inflation is likely to be accompanied by a recession.”

The recent decline in commodity prices is particularly dramatic for crude oil. The price of West Texas Intermediate, the US benchmark, fell below $100 a barrel on Tuesday amid concerns about the recession — much lower than a recent spike above $120.

Wholesale gasoline prices are also falling, which should trickle down to retail prices in the coming weeks. According to data from Kalibrate Technologies, the average price of regular unleaded gas in Canada has already fallen below $2 per liter, peaking at $2.15 a month ago. Alberta and Ontario have lowered provincial fuel taxes, contributing to lower prices at the pump. (Some economists say these moves will leave more money in people’s pockets and keep demand high.)

Gas is the largest contributor to the current high inflation in Canada. Without gas, the country’s inflation rate would have been 6.3 percent in May.

Doug Porter, chief economist at the Bank of Montreal, said the fall in gas prices could provide “great relief” in July’s inflation reports, which will be released in August.

“Of course, this is just the beginning. Oil prices should remain low and other costs should recede to provide lasting relief to the inflation outlook,” he wrote in a customer note on Tuesday. “But it’s a big step in the right direction.”

At points since the start of the pandemic, timber prices have exploded as people undertook renovations and developers built more homes. Now timber has fallen to a fraction of peak prices as higher interest rates put a brake on real estate demand, especially in the massive US market, and stronger inventories.

“All sawmills are well supplied in North America. Everyone has logs,” says Keta Kosman, owner of Madison’s Lumber Reporter, a Vancouver trade journal. “Supply keeps up with demand and the ability of factories to respond and adapt is good.”

Policymakers have attributed much of the inflation run-up to supply chain disruptions related to the pandemic, leading to product shortages, long delivery times and more expensive shipping. Lately, those disturbances have diminished. Logistics company Flexport Inc. reports that the average journey for containers leaving Asia to Europe and North America is getting faster – although it still takes longer than prepandemic delivery times.

Freight rates on major shipping routes have fallen about 40 percent from last September’s peak levels, but are still significantly more expensive than before COVID-19, according to logistics platform Freightos.

Despite the improvements, many economists are reluctant to say inflation has peaked. RBC’s Mr. Lascelles noted that high inflation has spread to a wide variety of products and services, rather than a few key drivers, and that commodity prices could rise again.

In addition, if inflation starts to decline, it could be a while before the target of 2 percent for Canada is reached again.

“Some intense things are gone at the moment, but there’s no guarantee they’ll continue to fall and we’ll settle down soon,” said Mr Lascelles.

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