The war on inflation isn't over yet, despite what some people think

financialpost.com:

Those in political power along with equity market participants seem to think the war on inflation has already been won, but perhaps it is too soon to declare victory.

Canada’s Minister of Finance Chrystia Freeland certainly appeared to be declaring mission accomplished a few weeks ago when she described the 2.8 per cent inflation print for June as a “milestone moment.”

South of the border, July’s 3.2 per cent inflation figure was welcomed with open arms by long-duration equity participants, with the Nasdaq rising on the news. As usual, long-duration bond market investors were having none of it, as 20- and 30-year U.S. treasuries traded slightly down on the day.

Some serious progress has been made on inflation, but this war is far from over, even though the United States government is spending as if it is. The U.S. budget deficit has hit US$1.6 trillion so far this year, more than double what it was a year ago. We worry that as this continues it could undo a large part of the progress accomplished through interest rate hikes by the United States Federal Reserve.

We’re already seeing some signs emerging that inflation is starting to fight back. For example, the U.S. July CPI print marked the first month-over-month increase since June 2022. Though inflation was down year over year, the largest components of the drop were fuel oil, down 26.5 per cent, gasoline, down 19.9 per cent, and gas utilities, down 13.7 per cent. Core inflation for the month still came in at a hot 4.7 per cent.

Base effects that have been working to reduce inflation could also turn against it. For example, WTI oil prices last July were more than US$100 per barrel, but fell to US$93 in August and then US$84 in September. If oil prices are higher than