While food prices haven’t yet come down to 2016-2020 levels, Stuart observed that they have declined considerably from mid-2022 levels. That’s come on the back of lower costs of fuel, fertilizer, and shipping.
The pattern of food prices also provides a good example of the “base effect” phenomenon which could play out with several items in the very near future. Even though prices remain higher than they were two years ago, Stuart said, comparisons with the 2022 peak will become more favourable as we approach summer and could cause posted inflation to decline sharply or even turn negative. “As our point of reference for one year inflation becomes the lofty heights of last summer, we could find that CPI is declining more quickly than most currently expect.
“Beginning in the third quarter of 2021, there were a lot of mentions on earnings calls about labour shortages,” he added. “Today, however, things seem to be straightening out a little bit … in management comments accompanying Q4-2023 earnings, for example, labour shortages came up far less frequently than in the recent past.”
Shelter costs are also showing signs of softening. For the past five consecutive months, rents in the US have declined, causing the yearly increase to plunge by about 80% from its peak in 2022 to a more normal 3.3% clip today. The pace of U.S. home price increases has also eased significantly, from as much as 25% annualized during the 2020-2021 pandemic housing fever to a current rate of about 1.3%.
The consensus forecast for recession, meanwhile, seems as strong as it’s ever been. Indicators such as surveys of money managers’ opinions, their allocations to bonds and equities, and margin balances in investment accounts all point to a deeply bearish sentiment and tilt toward risk aversion. But for long-term investors, Stuart said, that fearful attitude supports the view that much of the selling might already be behind us.