- \ Gerard Gruber
- June 1, 2022
There appears to be a growing consensus that the inflation surge is waning—or is that just wishful thinking? Prices have been surging throughout the economy at a torrid pace for more than a year as demand has dramatically outpaced supply. However, certain key indicators are signaling that the economy may...
There appears to be a growing consensus that the inflation surge is waning—or is that just wishful thinking? Prices have been surging throughout the economy at a torrid pace for more than a year as demand has dramatically outpaced supply. However, certain key indicators are signaling that the economy may have reached peak inflation and may taper off from here. The bad news is any relief from price increases is not likely to be felt for a while.
Inflation Numbers are Moderating
The inflation rate reported for April was 8.3%, which was slightly higher than expected but still lower than March’s 8.5%. Economists are taking that as a sign inflation may be leveling off and heading to a broader decline in the months ahead.
Drilling down on the two indicators economists rely on the most for measuring inflation—the Consumer Price Index (CPI) and the Personal Consumption Expenditure Index (PCE)—also shows a slight deceleration. The Fed favors the PCE index as its core measure because it strips out the more volatile food and energy prices. The most recent data shows the PCE index climbing 5.2% year over year through March, slightly less than the 5.3% pace reported for February and below forecasts.
The month-over-month reading is more evidence of deceleration, with the PCE index rising just 0.3% through March, similar to February’s reading but below the 0.5% increases reported from October to January. We’ll have to wait until May and June’s reading to know for certain this is a new trend.
Generally, prices across the economic spectrum are starting to moderate, including used cars and restaurants. Household goods such as furnishings, electronics, apparel, and prescription drugs are showing signs of flattening.
Consumer Inflation Expectations are Positive
The more encouraging news is that this current bout of inflation has not increased consumers’ inflation expectations. That is a critical factor because when consumer inflation expectations increase, it can lead to a rush on consumer purchases to beat future price increases. The sudden surge in demand against a static or dwindling supply can boost price growth further, causing growing inflation fears and higher prices to spiral out of control.
According to reports, the current data indicates that consumer inflation expectations have peaked, indicating that price growth should cool in the months ahead.
The Fed is Doing its Part
The Fed appears to be stepping up its efforts to cool inflation, promising additional rate hikes following its half-point increase in May. Fed-watchers anticipate more extensive hikes in the coming months, possibly topping out at 3% by yearend. That’s already having a chilling effect on the housing market, with mortgage rates exceeding 5% for the first time in several years. Consumers are also pulling back on spending on cars and fuel, which should relieve inflationary pressures.
The fear is that with the Fed coming late to the party on inflation, they may have to act more aggressively than they like, hiking interest rates too high, too quickly, which could tip the economy into a recession. While no one wants a recession, it’s a sure-fire way to kill inflation.
What Could go Wrong?
While current inflation trends are positive, they can react suddenly to various factors. Supply chain disruptions have been a major contributor to rising inflation, and though it seems to have come through the worst of pandemic-related problems, it’s still somewhat fragile. The latest COVID lockdowns in China are already obstructing shipments to the U.S., which could lead to more shortages and price hikes.
While the energy market has stabilized in the last couple of months, it continues to come under significant pressure due to the uncertainty in Eastern Europe and Russia. Energy experts are forecasting elevated fuel prices through 2022 and into 2023. Not much is being done domestically to increase energy supply which is propping up fuel prices.
Right now, these are the significant X-factors that could upset current trends. The challenge is it’s not clear when or if things will improve in China or Ukraine anytime soon. Assuming they do, we will still be living with higher inflation for some time, but it seems the worst is over.
This information is for general purposes and is not intended to provide specific investment advice or recommendations. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. Individuals should always consult their own financial or tax advisor regarding their specific situation before acting on any information provided. Harbor West and Geneos Wealth Management, Inc. do not provide tax or legal advice.
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