Has Inflation Peaked?
After I published Have Mortgage Rates peaked? last week a reader asked me why I thought the yield on the 10-year Treasury Bill would not continue to increase, so that even if the spread over the 30-year Fixed Rate Mortgage (FRM) narrowed, the FRM rate itself might still increase.
In Are we already in a Recession?, published on June 18, I wrote: “Just as the yield on 10T has more than doubled since pre-COVID while the Fed Funds rate is unchanged, so the Fed Funds rate can increase sharply – the Fed is forecasting it will reach 3.4% this year, also double its pre-COVID level – without necessarily impacting the yield on 10T. That will depend upon the economic outlook. Ironically, perhaps, the more determined the Fed is to drive down inflation – even at the cost of a recession and higher unemployment – the greater the chance that the yield on 10T – and by extension the FRM – will decline – at some point.”
In the last few days, as more economists talked about a recession after the Atlantic Fed updated its Q2 GDP estimate to minus 2.1% (it was 0% when I wrote on June 18), the yield on 10T has dropped sharply, falling to 2.9% from a peak of 3.5% in the middle of May:
Jim Cramer’s types of inflation
On Thursday on Mad Money, Jim Cramer talked of the 6 different types of inflation and scored each as to whether or not the Federal Reserve was winning – his conclusion was that it was in 5 of the 6 categories. Here are his comments (as I noted them down, any errors are mine):
Housing: price growth slowing; price reductions in 3 months
Retail: merchandise glut – retail inflation disappeared in June
Commodities steep declines copper, nickel, natural gas, lumber, aluminium, silver, grains – all ex oil.
The chart below is the London Metals Exchange index of aluminium, copper, zinc, nickel and tin – it is down 30% from its March peak:
Natural gas, in the same period, is down 40%:
Driven by the war in Ukraine, crude oil remains elevated, but the price has moved in a range in recent weeks:
While wheat prices have also returned to pre-invasion levels:
Transport – freight costs have peaked. The May report from Logistic Managers stated: “the logistics industry continues its regression towards the mean after nearly two years of rapid growth. The reading of 67.1 is slightly above the all-time average of 65.3 for the overall index, but down considerably (-9.1) from March’s all-time high reading of 76.2.”
Wages not under control
Financial Cramer described crypto-currencies as “the last bastion of rampant speculation” and concluded that the Fed has beaten financial inflation
So, has inflation peaked?
The rate of decline in the Atlanta Fed’s estimate of Q2 GDP has accelerated dramatically. At the beginning of Q2 the estimate was for 2% growth; two weeks ago it was 0%; and now it is minus 2% which, following a decline of 1.5% in Q1, would put the US firmly into a recession:
As I have written many times, the Fed is coming late to the party. It could – and should – have started its tightening cycle as much as a year ago when a gradual approach would have achieved a slowdown to its desired soft landing. But it is forced to play catch-up now and, because economic data reports what happened in the past, it will be taking action based upon past activity more than current. It is likely, therefore, that it will be raising interest rates even as the economy is slowing dramatically.
There may be “unknown unknowns” out there, but as I write this on Friday evening, it looks to me that inflation is at or close to a peak.
And read these recent articles:
Economic and mortgage commentary:
Have Mortgage Rates peaked?
Are we already in a Recession?
Federal Reserve in Fantasyland: Implications for Housing Market
Time to Consider an Adjustable Rate Mortgage
Federal Reserve: “Make me responsible…. but not yet”
Earth to Federal Reserve: What are you waiting for?
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, please contact me on 617.834.8205 or email@example.com.
Andrew Oliver, M.B.E.,M.B.A.
Market Analyst | Team Harborside | teamharborside.com
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Andrew Oliver, M.B.E., M.B.A.
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