JENNIFER GAUTHIER/The Globe and Mail
As inflation rates climb to multi-decade highs across the world, some of the biggest drivers of consumer-price growth have entered a new and welcome phase: Their prices are actually declining.
Crude oil, wheat and lumber are among several commodities that have tumbled in recent weeks. Shipping rates on major trade routes are sinking from record highs. And used-car prices, which surged during the past two years, are showing early signs of tailing off.
Furthermore, bond investors’ expectations of inflation are also falling, an indication that Wall Street is increasingly optimistic that sky-high increases in consumer prices will be brought to heel.
It’s an encouraging development for central bankers as they tackle the biggest inflation threat in decades with rapid increases in interest rates. At the same time, it would be premature to say inflation is peaking, several financial analysts say, let alone that central bankers should tap the brakes on further rate hikes.
Inflation remains uncomfortably steep in major economies, with Canada’s annual rate hitting 7.7 per cent in May – the highest in nearly 40 years. Hefty price increases are spreading to more products and services, while companies’ and consumers’ short-term expectations of inflation – a key determinant in setting prices and negotiating wages – are also rising.
In the next stage of the fight, financial analysts expect the Bank of Canada to raise its policy rate by three-quarters of a percentage point next week, taking it to 2.25 per cent from the current 1.5 per cent.
The central bank and its global peers are hiking interest rates to curb demand in the economy, but hope to engineer a “soft landing” that tames inflation while avoiding a recession. However, recession fears have gripped global markets in recent weeks as investors bet that consumer demand will weaken substantially in response to higher interest rates – hence the falling prices for major commodities.
“It’s undeniable that some of the things that were first driving inflation are doing that 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 full taming of inflation likely does involve a recession.”
The recent swoon in commodity prices is particularly dramatic for crude oil. The price of West Texas Intermediate, the U.S. benchmark, fell below US$100 a barrel on Tuesday on recession concerns – far lower than a recent peak above US$120.
Wholesale gasoline prices are dropping, too, which should trickle over to retail pricing in the coming weeks. Already, the average price of regular unleaded gas in Canada has fallen below $2 a litre, having peaked at $2.15 a month ago, according to data from Kalibrate Technologies. Alberta and Ontario have cut provincial fuel taxes, contributing to lower prices at the pumps. (Some economists say those moves will leave more money in people’s pockets, and keep demand hot.)
Gas is the largest contributor to today’s high inflation in Canada. If gas were excluded, the country’s inflation rate would have been 6.3 per cent in May.
Doug Porter, chief economist at Bank of Montreal, said the plunge in the price of gas could offer “major relief” in July inflation reports, which are published in August.
“Of course, this is only a start. Oil prices would need to stay down and other costs would need to relent to provide lasting relief for the inflation outlook,” he wrote on Tuesday in a client note. “But it is a big step in the right direction.”
At points since the beginning of the pandemic, lumber prices exploded as people undertook renovations and developers built more homes. Now, lumber has plunged to a fraction of peak prices as higher interest rates curb demand for real estate, particularly in the massive U.S. market, and because of stronger inventories.
“All the sawmills are well-stocked across North America. Everybody’s got logs,” said Keta Kosman, owner of Madison’s Lumber Reporter, a trade publication in Vancouver. “The supply is keeping up with the demand, and the ability of mills to respond and adjust is good.”
Policy makers have pinned much of the inflation run-up on supply-chain disruptions related to the pandemic, leading to product shortages, lengthy delivery times and pricier shipping. Of late, those disruptions are easing. Logistics company Flexport Inc. reports the average journey for containers that leave Asia for Europe and North America is getting faster – although still taking longer than prepandemic delivery times.
Freight rates on major shipping routes have fallen about 40 per cent from peak levels last September, but are still significantly more expensive than before COVID-19, according to the logistics platform Freightos.
Despite the improvements, many economists are reluctant to say inflation has peaked. Mr. Lascelles of RBC noted that lofty inflation has spread to a wide range of products and services, rather than a few key drivers, and that commodity prices could climb again.
Moreover, if inflation starts to ease, it could still take a while to return to target, which for Canada is 2 per cent.
“Some intense things have gone away for the moment, but there’s no guarantee they continue to go down and that we settle back down quickly,” Mr. Lascelles said.
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JENNIFER GAUTHIER/The Globe and Mail