Inflation Is Hot, but How Long Will It Last?

By: Edward Jones
DEWITT, Mich. - Nov. 16, 2021 - PRLog -- This week, we continued to see signals that inflation in the U.S. remains hot, with both the producer price index (PPI) and consumer price index (CPI) coming in above expectations, now at multidecade highs. The headline CPI reading came in at 6.2% year-over-year, the highest level since 1990, while the PPI reading was 8.6%, the highest on record since 2010. This was driven by what we consider more transitory factors, including areas like energy and auto prices, as well as stickier components of inflation, like rent and wages.

What is behind higher prices?

Inflation has remained elevated – with core CPI above 2.0% -- for nearly eight months now, since April of 2021, when the economy was reopening and vaccines were becoming more prevalent. Keep in mind that in the 10 years prior to the pandemic, average CPI was 1.6% and average core CPI was 1.8%, well below the latest CPI reading of 6.2% and core reading of 4.6%.

What is driving this elevated inflation? We believe the combination of strong demand and soft supply, caused by supply-chain bottlenecks, slow global reopening and labor shortages, and commodity-price inflation, have created imbalances, pushing up prices. In turn, these imbalances have shown up for consumers as higher prices at the gas pump and increased costs for groceries and apparel, putting some pressure on consumption broadly.

What could help ease inflationary pressure?

While elevated inflation can be a drag on consumption and growth, our view remains that inflation will moderate, perhaps by the middle of next year, but will likely remain elevated versus pre-pandemic averages.

How could inflation come down from here? There are components of inflation we consider more transitory that will likely come back down, while there are some we see as stickier that may remain elevated. The Federal Reserve itself has conducted a study outlining both the "flexible" and "sticky" parts of inflation.

Transitory parts of inflation: The components that are more transitory include areas like prices for energy and gas, automobiles, and food and lodging. Sectors like these have been battling the triple whammy of supply-chain disruptions, labor shortages, and higher demand as the pandemic eases globally. However, keep in mind that the surge in prices we have seen this year will likely not repeat in the months ahead. In fact, annual comparisons will start getting tougher as we head toward April of next year. We also may start to see supply-chain disruptions ease in the new year. Already we are  starting to see early indications of this, as several auto companies have commented on improving supply conditions in their quarterly earnings commentary.

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