By and large, progress is being made in the battle against inflation. 

While core inflation may be proving more resilient to the effects of the most aggressive monetary tightening campaign in modern history, and there is the odd blip surrounding price growth on account of volatility in oil prices, inflation is a long way from where it was 18 months ago.

At one stage, inflation in the US was trending above 9%, whereas that figure was trending at 3% back in June, only to edge higher across the last couple months.

Locally, monthly inflation topped 8% at one point, whereas now consumer price growth is below 5%. On a quarterly basis, CPI fell from 7% in the March quarter, to 6% in the June quarter. This trend is also playing out in various other countries around the world.

While these figures still have some room to move before meeting central banks’ targets for inflation, most economists feel as though policymakers are done, or at least very close to being done with further rate hikes. 

If inflation continues to observe a downtrend, it may lead investors to reassess the broader market and rebalance their holdings as they take stock of things like risk appetite and sentiment.

Here are three areas of the market that might come into focus amid falling inflation.

Consumer-facing Businesses

Companies tied to consumer spending are also among those that tend to respond positively to falling inflation. For example, take ecommerce retailer Amazon (NASDAQ: AMZN), which features among stocks with the highest negative correlation to US inflation since the mid 1970s. 

Naturally, as inflation cools, consumer sentiment starts to improve. Ultimately, consumers are left with more disposable income, and the broader retail environment benefits as a result. 

This is a phenomenon that could be expected to play out for various other stocks that feature strong negative correlations to US inflation, including the likes of Kroger (NYSE: KR), Home Depot (NYSE: HD), and Lowe’s (NYSE: LOW).

Bonds

Another area that historically has come into favour during periods of falling inflation is the bond market. As it turns out, longer-dated bonds find themselves a bit of a ‘safe haven’ investment during a recession on account of the likely interest rate cuts that would follow, and prevailing bearish sentiment.

Government bonds are known for their ‘safety’ and liquidity, which often brings them into focus when the economy faces headwinds. Declining interest rates lead to higher future cash flows from bonds, with longer-term bonds offering greater yields to reflect the longer investment horizon and subsequent risk.

The BetaShares Australian Government Bond ETF (ASX: AGVT), SPDR S&P/ASX Australian Government Bond (ASX: GOVT), and Vanguard Australian Government Bond Index ETF (ASX: VGB) are just some of the names that invest in a portfolio of mostly long duration Australian government bonds.

For exposure to US Treasury bonds, options include the US Treasury Bond ETF – Currency Hedged (ASX: USTB), U.S. Treasury Bond 20+ Year ETF – Currency Hedged (ASX: GGOV), and the iShares 20 Plus Year Treasury Bond ETF (NASDAQ: TLT).

Information Technology

Broader tech typically stands to benefit as inflation falls, namely because interest rates often decline at the same time. This leads to lower borrowing costs and higher future cash flows. 

As many tech companies operate on the premise of extended periods of growth delivering future earnings, this effect is more pronounced. It is also why growth stocks, particularly in the tech sector, were susceptible to market weakness as inflation began to increase.

Take a look at the way tech stocks responded to the rate cut cycle that occurred during the first half of the pandemic. Of course, other tailwinds were in play, but tech has benefitted at various points in time from falling interest rates.

If this plays out again, some funds that might be watched closely include the BetaShares Nasdaq 100 ETF (ASX: NDQ), the Ultra Long Nasdaq 100 Hedge Fund (ASX: LNAS), the Morningstar Global Technology ETF (ASX: TECH), and the Global X Fang+ ETF (ASX: FANG).