Headline inflation may be peaking, but how quickly can it come down?

By: Edward Jones
DEWITT, Mich. - April 19, 2022 - PRLog -- Headline inflation may be close to a peak

This week, investors digested two important inflation readings for the month of March ā€“ the U.S. consumer price index (CPI) and the producer price index (PPI). Both indicators remain at multidecade highs.
  • The CPI figure came in at 8.5% year-over-year, in line with expectations and at a 40-year high, while core CPI (excluding food and energy), came in at 6.5%, slightly below forecasts of 6.6%1.
  • Meanwhile, PPI, which measures prices paid by domestic producers, came in at 11.2% year-over-year, the highest on record.
While headline inflation remains hot, we may be seeing early signals that it could peak in the weeks ahead. Most notably, the upward pressure on energy and commodity prices has shown some sign of abating, despite the ongoing crisis in Ukraine. For example, the average WTI crude oil price in March was $108, while thus far in April the average price has been $991. If this trend continues, we could see lower headline CPI inflation in the coming months.

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
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