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Silence of Inflation

In the next seven days, the majority of countries will release inflation data for May. The majority is estimated to report a high number but there may be a downward surprise to those estimates exception of a few countries. According to the PMI(Purchaser Managers Index) report for manufacturing, there are indications that inflation in many countries is lower on monthly basis.

This does not indicate a peaking of inflation in long term but will result in a bounce in the deflation trade that has been under-owned for a couple of quarters. These releases accompanied by quarterly rebalancing post a mid-month will bring in a much-needed relief for the investors.

Breaking down inflation into the components it is made of, there are indications of many peaking out as the demand is waning off till July/August. The main components keeping everyone worried are food and energy.

All governments and central banks need to implement all the tools aggressively to destruct the demand and bring ex-food and energy inflation down by a large percentage in the next three months. It would result in a much-needed respite for the asset classes and consumers, though it does increase the risk of a recession or a hard landing.

If the strategy of the government and central banks is the same as laid out here then this month's numbers would be the first peak with a downward trend on monthly basis for the next two or three months.

This by no means will be the peak for the medium or long term as the consumer demand would pick up again in September and at the same time, food and energy prices are also going to face the next level of hikes. Thus, investors need to treat the next bounce as a relief and create some cash rather than trapping themselves as the volatility would remain on a higher base.


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