Whipping Inflation

Mike Zaccardi, 2:19 am ET

HAS THE ECONOMY reached peak inflation? That might be the biggest question in financial markets right now. Economists at several Wall Street firms, including Goldman Sachs and Bank of America, say the highest pace of consumer price increases may now be in the rearview mirror.

Inflation is typically measured as a percent change from a year ago. From here, prices for goods and services may still go up, but at a slower pace. That’s the hope.

As financial writer Morgan Housel likes to quip, “Optimism sounds like a sales pitch, while pessimism sounds like someone trying to help you.” Suggesting we may see a slowdown in inflation usually triggers a flurry of unfriendly responses on Twitter.

Still, there are some signs that inflation has indeed peaked. One of the biggest drivers of the inflationary spike over the past year has been the meteoric rise in used car prices. A lack of semiconductor chips and labor woes led to a freefall in U.S. auto production and inventories. As a result, there have been few new cars on dealership lots, leading many to buy used vehicles instead. But the Manheim Used Vehicle Value Index now shows prices of preowned cars are down for three straight months. New and used vehicles are significant contributors to headline inflation.

On the other hand, food and energy prices continue to show massive annual increases. One indicator: A popular commodity index fund is up a whopping 53% from a year ago, thanks to higher oil prices. But not all the raw materials news is bad. The price of an important industrial commodity, copper, is down from a year ago.

On the labor front, Friday’s jobs report revealed continued robust increases in average hourly earnings. Also last week, the Bureau of Labor Statistics released its monthly jobs openings and labor turnover report for March. The report found that the number of job openings hit a new high of 11.5 million. The ratio of openings per unemployed worker has also climbed. The strong labor market is good for workers but bad for inflation.

Federal Reserve Chair Jerome Powell and the rest of the Federal Open Market Committee are, of course, seeking to cool inflation. Last week’s half-percentage-point interest rate increase by the Fed was the biggest hike since 2000. The May meeting also kicked off asset sales to shrink the Fed’s $9 trillion portfolio of bonds and mortgage-backed assets. It sounds strange, but the Fed might want to see stocks drop, mortgage rates rise and job gains slow. It’s all about whipping inflation.

So will inflation slow? We’ll get an update on the Consumer Price Index on Wednesday morning. The consensus forecast calls for an inflation cool down.

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Martin McCue
Martin McCue
13 days ago

Think about what an inflation “cool down” really means. We are talking about the inflation rate, and not prices. So, today’s decline in the annualized rate from 8.5% to 8.3% might be described as a “cool down”, but all it means is that current prices will continue to rise – just not quite as fast. And, make no mistake, no matter how much the “cool down” winds up being – whether to 8% or 6% or even lower, almost all of the higher prices we have seen in the past year will not go down at all. They are now fully baked into the economy and our checkbooks. The damage is effectively irreversible.

Kyle Mcintosh
Kyle Mcintosh
14 days ago

Thanks for the piece, Mike. For several months, it seems like most people just shrugged off inflation and paid the higher prices. I am now starting to see more sights that people are changing habits. We paid $88 for a relatively basic lunch in Pasadena recently, and my son still needed to grab a street taco after as his meal was so paltry. While it’s not the last time that we’ll eat out this year, it was a wake-up call that the cost-benefit of doing so just isn’t there most of the time.

Mike Zaccardi
Mike Zaccardi
14 days ago
Reply to  Kyle Mcintosh

Thanks, Kyle. Yeah, I know I anchor to old (low) prices at restaurants. It makes it easy to just eat the usual cheap meal in rather than pay higher prices out. But I still get my money’s worth at Golden Corral! I buy discounted gift cards on Sam’s Club and am in their rewards program – so it comes to 30% off each time I go! And just a $10 menu price. Gotta leave a nice tip for the staff though. They work so hard!

Nate Allen
Nate Allen
15 days ago

The era of increased globalization is what has kept inflation low even with large growth. The recent anti-globalization trends are disconcerting if just for the increases in inflation that directly follow as a result.

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