The first signs of falling inflation are there if you look

PRICES of children’s clothing in Singapore rose 11.6 per cent year on year (yoy) in September. Electricity costs increased 26.5 per cent, and chilled poultry prices 38.6 per cent. With prices rising at their fastest pace in 14 years, it may be difficult to feel optimistic. But stealthy signs are emerging that inflation has likely crested, which would mean huge relief for the economy, the Straits Times Index and global stocks. Consider the following realities, then draw your own conclusions.

Start with energy, a chief inflation driver globally. Singapore CPI (consumer price index) was up 7.5 per cent yoy in September. But this was its third straight month-on-month slowdown, thanks partly to cooling energy costs. Petrol prices are down 16 per cent. Falling energy costs have also slowed US inflation since June. Oil is down 25.2 per cent since its March high. American petrol prices bounced in early October, but remain 25 per cent below their mid-June highs. Energy contributed over a third of the eurozone’s 10.7 per cent yoy inflation, on fears of winter gas shortages. But storage filled far faster than feared. New import terminals are coming online. Eurozone gas prices, while still elevated, are down sharply from August highs.

Next, food. Russia’s invasion of Ukraine initially caused a spike in global wheat and grain prices. But pressures have tapered off since. In America, wheat is down 31.8 per cent from March highs. The United Nation’s World Food Price Index, down for six straight months, is 14.7 per cent below March’s high.

In housing, Singapore is an anomaly. US home price gains peaked in March, slowing sharply as homes take longer to sell. Price rises have begun slowing across Europe. In Australia, they are falling. And home price movements routinely lead those for rents.

For businesses, S&P Global’s Singapore purchasing managers index (PMI) showed September input prices climbed. Output prices, however, hit four-month lows. The Institute for Supply Management’s October US manufacturing PMI revealed faster delivery times and slowing inventory growth, with input prices declining.

Global shipping costs have fallen, too: Shanghai freight rates are about a third of January’s levels (in US dollar terms). The Baltic Dry Index, a gauge of maritime freight rates, is down 55.3 per cent since May’s 2022 peak and 73 per cent from last October’s 13-year high. A fall in this index is often seen as a recession warning, but could now also be a sign of supply-chain snarls improving.

Pessimists claim tight labour markets, including what Singapore faces, augur higher wages, preceding other prices soaring. They miss what American Nobel laureate Milton Friedman proved 60 years ago: Wages follow, rather than lead, prices. And, while Singapore hiring accelerated in Q2 and Q3, larger economies are seeing slowdowns. US average payroll gains in the six months through September were 60 per cent of the prior six months’.

Perhaps you believe central banks stoked inflation with ballooning money supply. But globally, the growth in M2 – a measure of currency in circulation, deposit accounts and money funds – peaked at 23 per cent yoy in late 2020. It was just 7.2 per cent in June, matching pre-Covid norms. Singapore M2 growth, in double digits from June 2020 through March 2021, is now 4 per cent. Growth for US M4 – the broadest measure adding in cash-like securities – hit 30.9 per cent in June 2020. It was 1.9 per cent in September.

This is happening globally despite central bankers’ actions, big or small. The Monetary Authority of Singapore carries out monetary policy through the exchange rate, but most central banks use interest rate changes. The latter can influence lending and banks’ overnight borrowing costs, hitting economies at a lag. But when banks have ample deposits, which is true almost everywhere globally, they needn’t borrow overnight to support lending. Consider America’s “aggressive” Federal Reserve, which has raised the federal funds rates by a total of 3.75 percentage points this year. Yet, lending has accelerated from January’s 4.3 per cent yoy growth to September’s 11.6 per cent. That doesn’t ease inflation. But it shows today’s improvements aren’t about hikes.

Inflation’s peak will only be crystal clear in hindsight. But many of the figures cited above are forward indicators that inflation data don’t reflect yet. Today’s inflation is like a snake that just ate a huge rodent. There is a big bulge in the middle, until the snake digests it, one vertebra at a time. The world ate a lot of inflation two years ago. Digesting the bulge – now underway – will be a major relief that fuels a stock and bond rally globally.

The writer is the founder, executive chairman and co-chief investment officer of Fisher Investments, an independent investment adviser serving both individual and institutional investors globally.