Why inflation may already have peaked

There is good news and bad news in Tuesday’s inflation report.

• The bad news: Consumer prices have risen by a shocking 8.5% over the past year, a rate of increase not seen in more than 40 years..
• The good news: It is possible that this number has risen to the point where it will reach, and could soon begin to decline.

what are they saying: Bank of America analysts said on Tuesday that inflation has “likely peaked”. Their counterparts at Capital Economics agreed, saying the 8.5% figure “represents the peak” of the chain.

How it works: The headline inflation figure, which rose by 1.2% in March alone, was largely driven by energy prices. Core inflation, which excludes food and energy, was relatively low, rising just 0.3%.

• There is probably good news in the upcoming April inflation report: Oil has fallen to $94 a barrel, down from a peak of $124 on March 8.
• gas prices The lower oil prices followed. The average US price of $4.08 is down 6% from $4.34 in early March GasBuddy.

be clever: Fundamental effects matter a lot when looking at annual inflation numbers.

• We are now at the end of a period in which we are comparing prices that have fallen artificially due to the pandemic – and we will soon be comparing prices that have been reaching artificially high levels thanks to global supply constraints.

the other side: Any declaration that inflation has peaked is necessarily “temporary at best,” RSM’s Joe Brusolas wrote in a research note, given the volatility and unpredictability of oil prices in wartime.

• If Europe stops importing oil and natural gas from Russia for any reason, that alone could drive up energy prices again.

What’s Next: The Fed will continue to raise interest rates throughout the year. The central bank is trying to ignore volatile food and energy prices, but core inflation, at 6.7%, is well above the Fed’s 2% target.

• Higher interest rates are already starting to appear in the mortgage market, where 5% mortgages are now popular. This should help slow home price inflation.

Bottom line: We may go from high and rising inflation, to high and low inflation. This is better, but still not great.