Consumer prices jumped in October, but one indicator says inflation might be peaking

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  • Some traders and economists believe that inflation reflected in the Consumer Price Index may peak in October.
  • That expectation is based on the recent sharp fall in the Baltic Dry Index, a popular measure of global shipping rates used by economists as a leading indicator for inflation.
  • “Inflation is still high, and the pace at which supply and demand pick up will vary,” says one economist. Is.”

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Consumer price growth hit a three-decade high in October as supply-chain disruptions and holiday-shopping demand fueled inflation across a range of industries.

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But as hot as the October report was, some fixed-income traders and economists say inflation could cool off in November and December, and peak last month’s growth.

This expectation is based on a recent slide in the Baltic Dry Index, or BDI, a popular measure of global shipping rates used by economists as a leading indicator for inflation.

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“The decline in the Baltic Dry Index could indicate that what is happening in the economy is reversing itself,” Gus Faucher, chief economist at PNC Financial Services, told CNBC in an email. The decline “is a sign that perhaps the worst of it is over, at least for goods that are traded internationally.”

Faucher’s remarks came after the Labor Department reported that its consumer price index, or CPI, jumped 6.2% in October from a year earlier, the biggest acceleration since December 1990 and a fifth-straight reading above 5%.

Such heated inflation reports have led some of the nation’s top economists, including Federal Reserve Chairman Jerome Powell, to believe that inflation could last a while before it eases.

The market reacted to the October print as expected, and in the event of a price hike.

A popular hedge against rising prices, gold rose to its highest level since June with futures at $1,860 an ounce. The interest rate on the short-term 2-year Treasury note, a rough gauge of traders’ forecasts for future Fed rate hikes, rose 6 basis points to 0.5%.

Equities declined, reflecting investor fears about higher borrowing costs. The S&P 500 lost 0.25% and the Nasdaq Composite lost 0.6%.

But that response could be overstated if shipping freight costs prove reliable as a leading indicator for other inflation gauges.

The Baltic Dry Index, which tracks freight rates for ships carrying raw materials and is reported daily, began rising sharply in January, when it rose from 1,350 in December to 2,000.

Less than two months later, the CPI climbed above the Fed’s long-term inflation target of 2% to 2.6%, reaching its highest level since 2018.

The BDI continued to rise – and to foreshadow an increase in consumer prices. That is, until October 7, when it hit a high of 5,650, its highest level in more than a decade.

Since then, the BDI has fallen by 50% and most recently reached its lowest level since June, tracking a drop in global shipping rates. This has led some, such as Foucher, to suggest that inflation could ease in the last two months of 2021.

“Inflation is still high, and the speed at which supply and demand increases will vary in different parts of the economy,” he said. “But it looks like, overall, the worst runup in import inflation may be over.”

looking back vs looking forward

Those who suggest a major component of inflation may note that the BDI updates are both daily and lead to other inflation gauges while the CPI reports are more retrospective.

Every month, Department of Labor statisticians go to or call retailers and ask them how much they’re charging for a predetermined basket of goods and services: How much does a barber charge for a haircut? How much is the local convenience store charging for a gallon of regular gasoline or a dozen eggs? How much is Apple charging for its new iPhone?

The Bureau of Labor Statistics then compiles the survey results collected from the entire month and presents the findings to the world about a week after the start of the following month. This means that the inflation reading is, by design, looking backwards.

“I think all valid leading indicators should be looked at,” Thierry Weisman, global interest rates and currency strategist at Macquarie Group, wrote on Wednesday. “Shipping rates will measure the tightness of ocean freight markets, which are a significant bottleneck in the supply chain.”

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The Biden administration’s Supply Chain Disruption Task Force agrees. The group said in a recent blog post that it Monitoring of Shipping Backlog at Ports As a major reason, supply across the country has been unable to keep pace with consumer spending.

Inflation represents a threat to the Biden administration policy agenda and any Democrats vying for election in 2022. In a recent NBC News poll, 57% of Americans said they disapprove About Biden’s handling of the economy, while just 40% said they approve. Other surveys show that Inflation and economic concerns Allaying concerns about Kovid.

The White House stepped up its supply-chain action on Tuesday when it announced it would soon begin work with the US Army Corps of Engineers on $4 billion construction work on coastal ports and inland waterways.

A senior administration official said the administration is looking to deploy $3.4 billion in upgrades to obsolete inspection facilities that would make international trade through the northern and southern borders more efficient.

President Joe Biden was set to visit the port of Baltimore on Wednesday to discuss how the bipartisan $1 trillion infrastructure bill could help ease supply-chain problems.

Other factors in inflation

There is still a lot of debate about how to read the October inflation report and how prices will move in the coming months.

Sung Won Sohn, an economist at Loyola Marymount University and SS Economics, wrote on Wednesday that labor shortages still plague global supply chains and show no signs of easing.

“Inflation is spreading like wildfire,” he wrote in an email. “Wages and wages are moving upward as businesses scramble for workers offering higher wages, bonuses and other benefits. Businesses find little resistance to higher prices as inflation expectations rise.”

Higher wages and more generous benefits packages, some warn, could prompt some of those businesses to raise rent prices in the future to offset the hit to their bottom line.

So far this has not happened as inflation is currently outpacing wage gains.

Earnings may be up 4.9% on a year-over-year basis, but the CPI is over 6%. This means that the average real wage has actually declined over the past 12 months. Many Americans simply can’t afford as many gallons of gas, egg cartons, or barrels of household heating oil as they did a year ago.

There is also the issue of changing consumer behaviour.

As Americans end their holiday shopping, their demand for international goods may drop and traffic at West-Coast ports may ease. Instead, they can choose to spend their income on the service side of the economy and travel, visit spas and resorts, and attend live music and sporting events.

In that case, it’s not entirely clear what might happen to inflation.

The Fed, in charge of keeping inflation stable, says it expects inflation to get worse before it gets better.

Powell said during a press conference last week that central bank economists expect high inflation to persist “for well into the next year.” However, he added that he expects the price hike to subside by the second or third quarter of 2022.

He also indicated that he is not worried about a tight labor market.

“The inflation we’re seeing isn’t really because of a tight labor market. It’s because of constraints and it’s because of shortages and it’s because of very strong demand,” Powell said a week ago. “It is very difficult to predict the persistence of supply chain constraints or their effects on inflation. Global supply chains are complex. They will return to normal function but the timing of this is highly uncertain.”

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