Chart of the Week - Disinflation Dissipation

An inconvenient chart for rate cutters

I’ve got a nice new weird indicator for you today (my favorite kind of indicator).

Basically we are keeping track of the global disinflation pulse – relevant because inflation rates are still directly influencing central bank policy decisions and interest rate levels.

For instance, here in my country the RBNZ even raised the prospect of unpausing back to rate hikes as it was unhappy with the pace of disinflation vs its expectations.

But real quick, because there is some confusion, let’s clear up a few terms on inflation…

Inflation = the rate at which prices are going up

Disinflation = a slower rate of inflation (prices are still going up, but at a slower pace)

Reflation = a faster rate of inflation (prices are going up faster (or falling less))

Deflation = when inflation is negative (prices going down)

Hyperinflation = when inflation spirals out of control

Also, for clarity — contrast the rate of inflation/deflation/disinflation with the *level* of prices. You can get a high level of prices e.g. after a period of very high inflation, but then a low rate of inflation – this is the type of situation where central banks might be happy with the rate of inflation, but consumers are still unhappy and struggling with the level of prices.

With that cleared up, what we are focused on in terms of how it impacts central bank decision making on interest rates – is the rate of inflation (vs target) and the trend in the level of inflation (disinflation vs reflation).

If the rate of inflation stays high (above target) or the pace of disinflation disappoints vs the central bank’s central forecasts, or worse: if the rate of inflation reaccelerates (reflates) – this takes you into a scenario of higher for longer.

Interest rates either need to stay higher or be increased again to try and stop inflation from getting entrenched and anchored in at a higher rate. 

THAT is why we care about global progress on disinflation.

And this brings us to this week’s chart…

What we’ve got here is the net-percentage of countries who are seeing their inflation rates increasing vs decreasing.  Negative readings mean more countries are seeing falling inflation rates (a global disinflation wave), positive readings mean more countries are seeing higher inflation.

Clearly the Great Disinflation of 2023 has troughed, and producer prices have already turned the corner back to reflation. So the underappreciated macro risk is the global disinflation wave is over and resurgence risk comes online, forcing central banks to keep interest rates higher for longer.  Keep watch for bond market risk (and stocks/yield sensitives in the extreme), and upside opportunities in commodities — which are a key part of the turn in this indicator.

Key point:  We have seen a climax in disinflation globally, and reflation/resurgence risk is very real (higher for longer risk for rates).

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Topics covered in our latest Weekly Report

Aside from the chart above, here’s what subscribers to our entry-level service learned and discovered to help their investment decisions:

• Market Update: check on sectors, credit spreads, FX, bond yields

• USD Technicals: big impending move for the DXY coming

• Growth Reacceleration: documenting the unfolding theme

• Commodities: the cyclical vs secular outlook

• Commodity Equities: very interesting setup + insights

• Inflation Resurge Risk: disinflation dissolving

• Global Policy Pulse: pauses, pivots, and puzzles

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Thanks for your interest. Feedback and thoughts welcome.

Sincerely,
Callum Thomas
Head of Research and Founder at Topdown Charts

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