Does the fall in gasoline prices signal the end of the spiral of inflation in the United States?

After hitting multi-decade highs in recent months, stubbornly high inflation in the United States has begun to ease and shows signs of returning to somewhat normal levels soon. In August, the headline inflation fell to 8.1%higher than expected but lower than June’s four-decade high of 8.5%, with volatility in food and energy prices, or core CPI, the main cause, at 6% more than last year.

The Biden administration is now increasingly convinced that inflation will fall further thanks to falling oil and gas prices. According to a investigation On Monday, from the New York Federal Reserve, US inflation is expected to average 5.7% over the whole of 2023 and contract to 2.8% in three years thanks to lower oil prices. ‘essence.

To be fair, energy is only part of what has caused runaway inflation plaguing the United States in the current year with widespread supply chain issues, rising demand , high production costs, a global pandemic and swaths of government bailouts also to blame.

This spike in oil and gas prices has wreaked havoc on many industries, from transportation to manufacturing, so the reversal in the trajectory of oil prices is also having a ripple effect.

According to AAA.the national average for unleaded gasoline has fallen all summer, averaging $3.71 a gallon on Monday, down 26% from its mid-June high of $5.01. Meanwhile, the gasoline price index fell 7.7% during the month, which helped weather increases in food and housing costs.

These numbers come at a time when the Fed is using aggressive interest rate hikes to fight against inflation which is still close to a high of more than 40 years. The central bank is widely expected to approve a third straight increase of 0.75 percentage points when it meets again next week.

In a rather extreme view, contrarian fund manager Cathy Wood of ARK Invest (NYSEARCA:ARKK) predicts that deflation, rather than inflation, will dominate US markets going forward.

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The innovation-themed asset manager believes Jerome Powell and the Federal Reserve are miscalculating the outlook for inflation by raising rates at such a rapid pace, Tweeter out: “Powell uses Volcker’s hammer and, I believe, makes a mistake. The Fed bases its monetary policy decisions on lagging indicators: employment and underlying inflation. Major inflation indicators like gold and copper signal the risk of deflation. Even the price of oil has fallen more than 35% from its peak, erasing most of the gain this year.

In February, Wood told a webinar that advances in technology would likely boost productivity rates, outweighing any increases in wages.

“We are confident that the productivity gains we will see over the next five to ten years will be astounding. We believe that productivity will increase by more than 5% and that we will not have an inflation problem,” she says.

ARK Invest is famous for betting on high-value, high-growth stocks that soared at the start of the pandemic. Indeed, the ARKK portfolio appears vulnerable to further declines in tech valuations due to its overweight in high-multiple stocks.

Unfortunately, Wood’s contrarian approach hasn’t exactly yielded outstanding results this year, with his ARK Innovation ETF down 53.5% since the start of the year. Four innovative technology funds that outperformed ARKK in 2022 are: ALPS Disruptive Technologies ETFs (DTEC), Wolf Frontier Tech Innovative ETF (WOLF), ETF Main Thematic Innovation (TMAT) and Future Tech ETFs (BTEK).

Whether it’s inflation or deflation, lower gas prices might not translate to a lower cost of living for the average American. While consumers expect inflationary pressures to ease somewhat, they mostly believe that the cost of living will continue to rise.

Indeed, median expectations for household spending over the next year increased by 1 percentage point to 7.8% in August, those with a high school diploma or less and a group consisting of largely from low-income people being less confident about the outlook.

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To complicate matters, respondents say credit is harder to come by. With a streak high of 57.8% indicating it’s either harder or much harder, the New York Fed reported. Additionally, people are increasingly less confident about paying off their debt on time, with a healthy 12.2% of respondents expecting to miss a minimum debt payment in the next three months, a gain of 1 .4 percentage points and the highest reading since May 2020.

And in the meantime, high volatility is here to stay.

From an investment perspective, the energy sector continues to be among the most volatile in the US stock market.

Last week, financial players observed a slowdown in market volatility as major averages ended in the green. Traditional readings for the S&P VIX Index (VIX) also fell 14% over the week to $22.79. PriceVol, a proprietary risk indicator generated by ASYMmetric ETFs, sees an average daily decline in weekly realized volatility from 6.6 to 6.2. Volatility is an integral part of how investors value the market, and PriceVol is an instrument capable of measuring the full volatility landscape reflected in the S&P 500.

ASYMMETRIC S&P 500 ETF (NYSEARCA:ASPY) is a fund that was developed from the PriceVol instrument. ASPY operates as a long/short quantitative hedging strategy that seeks to provide investors with a safety net against bear market sell-offs by going net short, while seeking to capture the majority of bull market gains, by going net long .

From a sector point of view, the Energy (XLE) observed the highest volatility level with a realized volatility level of 6.7. At the opposite end of the spectrum, Immovable (XLRE) experienced the lowest level of realized volatility at 2.4.

By Alex Kimani for Oilprice.com

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