Chart of the Week - Inflation Resurgence
Something very interesting is happening in the macro world right now.
Central Banks have undertaken a mass-migration from hiking rates to cutting rates.
Normally this type of policy pivot would only be seen as a panic response to recession, crisis, and downturns. And to be fair there are some weak spots out there, but there’s no crisis, no full blown recession, and asset markets are charging higher.
Inflation has come down —there is that; so you can argue that this pivot makes sense from the standpoint of pulling back on previous panic tightening…
But here’s the problem: disinflation is done.
Global median inflation rates have stabilized and some measures of inflation have even begun to turn up again.
And yet the rate cuts continue, with more central banks joining the movement (e.g. Australia + India commencing cuts this month).
That brings us to the chart below.
The red line shows the net number of central banks globally whose last move was a rate cut.
The recent surge in that indicator just goes to show how resolute the global rush to rate cuts has been.
The problem with that is the black line (pricing pressures).
The red line leads the black line (logic = rate cuts stimulate demand, higher demand tightens capacity and puts upward pressure on prices, inflation rises).
In other words, the core thesis is: stable growth (remember no recession or crisis forcing their hand this time) + global monetary policy easing = global growth reacceleration.
With commodities cheap and a decade of underinvestment in supply by commodity producers, I could not be more bullish on the outlook for commodity prices in this context. That’s a really important point — from a macro standpoint rising commodity prices means upward pressure on inflation…
From an investing and portfolio management standpoint that means a major upside opportunity (for commodities, but not much else; stocks and bonds might actually stumble in this scenario), and at the very least commodities are a logical and obvious hedge to a near and pressing risk.
So keep an eye on inflation resurgence risk and keep in mind commodities as a hedge against this rising risk.
Key point: The global rush to rate cuts mean resurgence risk is rising.
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