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All sorts of key commodities that have fed into inflation in the past year have turned downward. Wheat is down 35 per cent since spring, and lumber prices are about half of what they were in March.Jimmy Jeong/The Globe and Mail

After more than a year of trudging relentlessly up a dark, foreboding mountain of inflation, there’s an odd sensation in the air. Suddenly, our steps are landing on the downslope. There’s light breaking through on the path ahead.

Yes, in the past week we saw the first hard evidence south of the border that the rise in prices has – finally – slowed down. We can expect to see more this week, closer to home. It’s something to cheer about.

But maybe not too loudly yet. For central bankers, the peak of prices doesn’t signal the end of their fight against inflation, but barely the beginning. We still have a fair distance to go before those banks will declare their own turning point in interest-rate policy.

But first, that good news. The latest U.S. consumer price index report showed that the 12-month inflation rate dipped to 8.5 per cent in July, after hitting a 40-year high of 9.1 per cent in June. On a month-over-month basis, CPI was unchanged – the first time in more than two years that consumer prices didn’t rise from one month to the next.

Sure, it was only a single month of data. But there has been a decided shift in momentum in the forces that drove inflation to multi-decade highs. Chief among them are prices for gasoline, which tumbled nearly 8 per cent in July from June. Those prices have continued to retreat this month.

Canada’s July CPI comes out Tuesday, and economists expect inflation to dip to about 7.6 per cent from June’s 8.1 per cent. Again, falling fuel prices are providing much of the relief. As of last week, the average price at Canadian pumps was down about 7 per cent since the end of July, and about 11 per cent from a month ago, according to data from fuel-price-tracking firm Kalibrate.

It’s not just oil. All sorts of key commodities that have fed into inflation in the past year have turned downward. Wheat is down 35 per cent since spring. Lumber prices are about half of what they were in March. Copper is down about 25 per cent. Bank of Montreal chief economist Doug Porter recently noted that commodity prices overall are now actually lower than they were when Russia invaded Ukraine last February – an event that sent already high prices into the stratosphere.

Meanwhile, global shipping rates have slumped 40 per cent in the past five months, evidence of both easing supply backlogs and slowing demand growth.

Taken together, there’s good reason to think inflation will come further off its boil. Eventually, those declining costs are bound to filter their way broadly throughout consumer prices.

But “eventually” is the operative word here.

The falling prices we have begun to see might indeed be the prelude to a downward inflation trend across a wider swath of the consumer shopping basket. But it took months for the rising input costs of the past year to be broadly felt and widely passed along to consumers. Now that those costs are in retreat, we can expect it to take months for them to work their way out of prices.

Meanwhile, a cost pressure at the very heart of inflation – wage growth – still looks to be on an upward trajectory. Labour markets in both Canada and the U.S. remain strong, unemployment is at historic lows and workers are increasingly pressing for more generous wage settlements to offset the damage from high inflation. Those wage costs will linger long after other cost spikes have subsided.

There’s a school of thought that a near-term retreat of inflation from its peaks will give the U.S. Federal Reserve and the Bank of Canada justification to ease the pace of interest-rate increases, or even put rate hikes on hold by the fall – perhaps as a step toward cutting rates by next year. It’s not impossible, and we may well see some public and political pressure for the central banks to do just that.

But the danger is that the central banks ease off their rate hikes prematurely at early success in turning inflation around, before a slowdown in price growth has taken hold across the broad economy. Frankly, the first few couple of percentage points in inflation reduction is easy. The serious work for rate policy comes in the last couple of percentage points. Those will require rate-policy vision that goes beyond the immediate prospects for brighter inflation numbers.

“By this time next year, slow global growth, coupled with supply chain improvements, could engender negative 12-month inflation rates in items like gasoline, passenger transportation, some vehicles, and basic foods, in both the U.S. and Canada. But just as this year’s inflation was exaggerated by supply shocks in those items, their downward pressure on inflation would likely prove to be a one-time story,” Canadian Imperial Bank of Commerce chief economist Avery Shenfeld wrote in a research note Friday.

“The Fed’s concern during 2023, one shared by the Bank of Canada, will be whether the conditions will be in place to keep inflation low in 2024.”

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