The global economy is on the brink of an inflation collapse, according to a new report from Credit Suisse. The report predicts that over the next 12-18 months, prices for gas, oil and food will all fall sharply, leading to big gains in the stock market.
Futures markets are already indicating that prices will continue to fall, and rents and services have already begun to rise at a slower rate than headline CPI. This is good news for investors, as it means that stocks are likely to continue to outperform other asset classes in the coming months.
Inflation "collapse" will happen over next 12-18 months.
Gas prices and oil prices are already falling.
The price of crude oil has fallen by almost 50% since June 2014, from around $115 a barrel to less than $60 a barrel. The price of gasoline has also dropped, from an average of $3.70 a gallon in June 2014 to $2.40 a gallon in December 2014. These falling energy prices are already starting to lead to lower inflation rates around the world.
In the United States, the Consumer Price Index (CPI) fell by 0.4% in November 2014, driven largely by lower gasoline prices. This was the largest monthly decline in CPI since December 2008, during the global financial crisis. And it's not just the US: inflation rates have been falling in Europe and Japan as well.
Food prices are also falling.
Food prices have been declining as well, due largely to lower commodity prices. The UN food index, which tracks the prices of cereals, oils, meat, and dairy products, fell by 4% between August and November 2014. This is good news for consumers, as food costs make up a significant portion of household budgets globally.
Falling food and energy prices are leading to what economists call "disinflation." This is when the rate of inflation falls below 0%, or when there is actual deflation (negative inflation). Disinflation can be caused by various factors: slower economic growth, declining demand for goods and services, or increases in productivity (which lead to lower input costs).
Inflation "collapse" will lead to big gains in stock market.
Futures indicate that prices will continue to fall.
Futures markets are already pricing in lower inflation over the next 12-18 months. For example, the 5-year breakeven inflation rate, which is derived from the difference between 5-year Treasury Inflation-Protected Securities (TIPS) and regular 5-year Treasury notes, has fallen from around 2.6% in early 2018 to around 1.9% currently. This indicates that investors expect inflation to average below 2% over the next five years, which would be well below the Federal Reserve’s (Fed) target of 2%.
Services and rents are already rising less than headline CPI.
One of the main drivers of inflation is the cost of services, which make up a large part of household spending. However, service sector inflation has been trending down for several years and is currently at its lowest level since 2010. This is largely due to falling prices for communication and medical services, as well as slower growth in rents.
In conclusion, the Credit Suisse is predicting that a "collapse" in inflation will lead to big gains in the stock market. This is good news for those who have been worried about inflation rising too high. However, it is important to remember that this is just a prediction and not guaranteed to happen.