Have We Crossed The Peak Of Inflation?

Find out if the present macro scenario calls for tweaking your portfolio strategy

The favourite pastime of all macro-economists is to second-guess the US Fed and all other central bankers on what they would do to policy rates.

Investors can only react to changes, and it rarely, except at turning points, affects the overall portfolio strategy. We live in one of those turning points. There is some reason to participate in the speculation - if, as some think, the US rate increases are over, then there is reason to make some changes in portfolio allocation and start looking for assets that can benefit from stable to lower interest rates. If not, it may be early to make the shift and portfolio performance can suffer in the short term.

What is the market betting on?

Opinion, as always, is split. The bullish economists (if there is a tribe like that) argue that there has been a definite trend down in inflation, with the latest print coming in at 3 per cent. The graph USA CPI inflation' seems to justify the optimism. Year-over-year inflation has slowed to 3 per cent, and the trend seems to be headed lower. But it isn't as easy as this.

The graph 'USA CPI Index (all urban consumers)' shows why this occurs. The CPI index itself continues its upward trend, and inflation is the change in this index over the year (the difference between the two lines as a percentage). The first half of 2022 had a sharply rising index, which then flattened in the second half.

In H1 2023, the average monthly growth in the index has been 0.48 per cent. This allowed inflation to fall in the first half as the gap between the two graphs narrowed.