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Headline inflation may be peaking, but how quickly can it come down?
By: Edward Jones
This week, investors digested two important inflation readings for the month of March – the U.S. consumer price index (CPI) and the producer price index (PPI). Both indicators remain at multidecade highs.
How fast can inflation moderate?
While headline inflation may be able to moderate in the weeks or months ahead, the other key component of inflation, core inflation (excluding food and energy), tends to move slower. In particular, the shelter component of inflation, which accounts for about one-third of the CPI basket, has been stubbornly high, as home prices and rents have increased in the U.S. This comes as housing supply continues to remain low even as demand is steady. However, as mortgage rates rise, we may start to see some reprieve in shelter pricing as demand softens, but this may take time to flow through to inflation figures.
The other part of the core inflation basket to watch is autos and used car pricing. Here we have started to see prices come down in the March reading and may see more stability in the months ahead, particularly if financing rates rise and demand cools.
Overall, we continue to see inflation moderating perhaps more meaningfully in the back half of the year. This would be driven potentially by not only more stability in commodity prices, but also better supply-and-demand dynamics overall, including tempered consumer demand and more labor and goods supply returning to the market. Historically, inflation moves from peak to bottom over a period of 24 to 36 months, but during this time we tend to see steady downward movement. So while we may not return to 2.0% core inflation for some time, the direction of travel should be generally lower1.
Source: 1. FactSet
Edward Jones - Mae Luchetti