Inflation: Fallen SAAR, pivot may not be far

24 Jan 2023 , 10:48 AM

Inflation has cooled off somewhat in western economies, but while not yet down YoY to acceptable levels, on a sequential basis (SAAR) inflation fall has been rapid. If this trajectory continues for another month or two, central banks may rapidly reverse course. Add to this China reopening impact, and a global risk-on sentiment emerging within six months, is a scenario one must keep sight of.

Sequential inflation trends more important now

Generally, economic commentary has focused on YoY inflation. But, given large changes in inflation trajectory in a short period of time, what if sequential inflation is more representative and has settled to a multi-month, hence reasonably reliable trend?

SAAR inflation has fallen sharply in US as well as India

In the US, both headline/core 3mma SAAR CPI inflation are now < 3%. Within this, commodities ex- food & energy at -5%, energy -12%, food 6% (down from peak 14%) and only Shelter, which is a lagging indicator still trending up (whereas related leading indicators are down – Case Shiller home price index -6%, Zillow rent index 2.5%), are encouraging. Similarly, in India, 3mma SAAR for headline CPI inflation is at 3%, core CPI around 6%, and WPI -5%. Food inflation is down to zero, with vegetables negative (but this is volatile). Similarly, Miscellaneous is at 6% whereas Housing has fallen to 4%.

Add EU trends following US, and China reopening, and a risk on could happen

EU 3mma SAAR CPI inflation fell sharply to 5% in December 2022 from 13% in October 2022 (actually down to -5% on monthly SAAR basis). If this trend sustains and central banks react sharply by cutting rates, and China reopening adds to global growth — a global risk-on sentiment could emerge.