I heard UK prime minister Liz Truss on the radio this week. She thinks the government’s fiscal measures aimed at helping energy consumers will cause inflation to fall back by as much as 5%. And that would likely be good for FTSE shares.
Falling input costs
On top of that, I’ve been watching the prices of commodities drop. For example, lumber is bouncing around 70% below its peak value reached in 2021. But oil, palladium, platinum, copper, iron ore, wheat, oats and other commodities are all lower as well. And I reckon lower prices at the beginning of the production chain will likely feed into finished goods and services.
But there’s more positive news as well. Drewry’s composite World Container Index is around 50% lower than it was a year ago. Shippers are experiencing ongoing improvements after two years of slow transit times and port delays. And I think such factors will bear down on the well-reported supply chain problems and additional costs in many sectors.
Meanwhile, according to financial media company MarketWatch, chief North America economist at Capital Economics, Paul Ashworth, thinks a “disinflationary wave is building”.
Although he’s focused on the American economy, I think there is decent read-across for the UK. He reckons supply shortages have normalised in the US. And core goods inflation could fall back to just 2% before the end of the year. And that’s from a level of 7% in August.
My guess is the rapid hike in the rate of inflation we’ve seen could prove to be just another bubble. And it’s known that the terrible war in Ukraine helped to make the situation worse. I reckon that’s particularly true in the way it affected certain commodity prices.
However, the longer the war continues, the closer it gets to its end. Whatever that end may be. And the longer it continues, the more the world may find ways to adapt to its economic effects.
Keen stock valuations may not last
So I reckon the keen valuations we’re seeing in the stock market from fallen sectors may not last. If the level of inflation is set to fall, the cost-of-living crisis may prove to be less dramatic than expected. Consumers could end up with more disposable income in their pockets. And they may spend much of it on the goods and services supplied by businesses.
An improving outlook like that may cause share prices and valuation to rise in the stock market. But, of course, nothing is ever certain or guaranteed when it comes to stocks, shares and their underlying businesses. It’s even possible for me to lose money after buying cheap-looking shares if my theories prove to miss the mark.
Nevertheless, I’ve been snapping up some of the stock bargains I think I’m seeing, on the assumption that better economic times are just around the corner. I could be wrong, but it could soon be too late to buy cheap FTSE shares. Or at least to have so many to choose between.