After a string of 40-year highs, will inflation slow down? Some economists think so.
Has the nation’s nerve-jangling bout of inflation peaked?
Annual consumer price increases hit yet another 40-year high of 8.5% in March, and several research firms – including Barclays, Morgan Stanley and Wells Fargo – say that probably marks the worst of it.
After six months of steady advances in the consumer price index (CPI), the past five of which set fresh four-decade highs, the yearly rises should slowly decline through 2022, the economists say. And though prices will continue to move higher month to month, the increases should be less dramatic.
Such a scenario would still squeeze U.S. households struggling to keep up with ever-climbing costs. And economists believe inflation will remain an uncomfortably high 5% or so by year’s end. But it would at least feel as if the country were on the downhill side of a forbidding mountain.
“While people won’t feel it immediately and prices are still rising ... there will be a psychological effect,” says Gregory Daco, chief economist at EY-Parthenon.
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That could affect consumers’ inflation expectations, which in turn may help quell inflation itself by moderating workers’ demands for higher wages.
But some economists say inflation could drift still higher over the next couple of months.
Kathy Bostjancic of Oxford Economics believes inflation will peak near 9% in May before starting to abate. And she says price increases will need to ease significantly before they start changing Americans' inflation expectations.
A big reason experts see inflation starting to ease soon: Prices began rising sharply last spring and summer, and so the annual increase from a year ago will start to decrease because of simple math.
And the COVID-related supply chain bottlenecks and worker shortages that have fueled inflation seem to be starting to improve, economists say, though those issues won't go away quickly.
To avoid another all-time high and begin what could be a gradual descent, April’s monthly increase in the CPI needs to stay below 0.8%, Daco says.
What causes inflation?
What happens to gasoline prices could be key. The CPI jumped 1.2% last month – a 17-year high – and pump prices accounted for two-thirds of the increase as they surged 18.3%.
Oil and gas prices, though, have fallen in recent weeks. If they rise less than 8% or so in April from the prior month, overall inflation would start heading down, assuming other costs don’t increase more than they did last month, Daco says.
Used car prices will be another barometer. They declined for the second straight month in March, slipping nearly 4%, but are still up 35.3% over the past year. If much of the demand for used cars has been satisfied, as Daco suspects, that could go a long way toward keeping a lid on the broad price index.
Bostjancic is warier, noting used car prices “have been choppy.” Crude prices edged back over $100 a barrel late Tuesday, she notes, and wholesale gasoline prices rose about 15 cents a gallon.
“Today’s gains showed the fickle nature of what might be called a broken market,” says Tom Kloza, chief global analyst for the Oil Price Information Service. “I’m afraid inflation in oil is with us for this quarter and next, but it will be a roller-coaster ride.”
Will food prices go up in 2022?
Bostjancic also worries about a rise in food prices and a shift in consumer purchases from goods to services as the pandemic fades. The latter could further push up costs for airfares and hotels, which rose 10.7% and 3.3%, respectively, in March.
Then there’s Russia’s war in Ukraine, which could continue to disrupt global supply chains and drive energy and wheat prices – chief exports from the region – higher, Daco and Bostjancic say.
In other words, inflation may well have peaked, but it may drift higher in the next month or two.
In an era marked by pandemic and war, “there’s so much uncertainty,” Bostjancic says.
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