Inflation may cool off in November and December, Baltic Dry Index

The rate of consumer price increases jumped to a three-decade high in October as supply-chain disruptions and holiday-shopping demand fueled inflation across a range of industries.

But as hot as October’s report was, some fixed-income traders and economists say inflation in November and December could be cooler, and that last month’s surge could be a peak.

That expectation is based on a recent slide in the Baltic Dry Index, or BDI, a popular measure of global shipping rates used by economists as a leading indicator for inflation.

“The decline in the Baltic Dry Index may be signaling that some of the overheating in the economy that has been taking place is reversing itself,” Gus Faucher, chief economist at PNC Financial Services, told CNBC in an email. The decline “is an indication that perhaps the worst of this is over, at least for goods that are traded internationally.”

Faucher’s comments came as the Labor Department reported that its consumer price index, or CPI, jumped 6.2% in October from a year ago, the largest acceleration since December 1990 and the fifth-straight reading above 5%.

Hot inflation reports like that have led some of the nation’s top economists, including Federal Reserve Chairman Jerome Powell, to believe inflation may stick around a bit longer before subsiding.

Markets reacted to the October print as expected, positioning for more price increases.

Gold, a popular hedge against rising prices, rose to its highest levels since June with futures north of $1,860 per ounce. The interest rate on the short-duration 2-year Treasury note, a rough gauge of traders’ forecasts for future Fed rate hikes, climbed 6 basis points to 0.5%.

Equities, reflecting investors’ fears of higher borrowing costs, dipped. The S&P 500 lost 0.25% while the Nasdaq Composite shed 0.6%.

But that reaction could be overdone if shipping freight costs prove to be reliable as a leading indicator for other inflation gauges.

The Baltic Dry Index, which tracks freight rates for ships carrying raw materials and is reported daily, began to accelerate in January, when it to 2,000 from 1,350 in December.

Less than two months later, the CPI climbed to 2.6%, above the Fed’s long-term inflation target of 2%, and hit its highest level since 2018.

The BDI continued to rise – and to foreshadow increases to consumer prices. That is until Oct. 7, when it reached a lofty 5,650, its highest level in more than a decade.

Since then, the BDI has declined by 50% and recently hit its lowest level since June, tracking a decline in global shipping rates. That’s led some, like Faucher, to suggest the final two months of 2021 could see inflation ease.

“Inflation is still high, and the speed at which supply and demand catch up will vary across different parts of the economy,” he added. “But it looks like, in…