U.S. Inflation: Have We Peaked Yet?
- Keywords:
- inflation
The CPI increased a massive 1.2% in March, fuelled mostly by energy prices. This hoisted the annual change six-tenths to 8.5% y/y, marking the fastest inflation rate since December 1981. Some 40 years ago, inflation was on a downswing following a near three-year run of double-digit prints. Now, it’s been on a huge upswing. For the past few months, the acceleration in inflation from its year-ago paces has been the most in more than 70 years (exacerbated by ‘base effects’).
Meanwhile, excluding food and energy, the CPI increased 0.3%, lifting core inflation a tenth to 6.5%, also a fresh four-decade high. However, this was less than expected, with a monthly move decidedly below the stubborn 0.5%-to-0.6% range of the previous five months. And, with crude oil prices already off their highs hit in the wake of Russia’s invasion of Ukraine, and gasoline prices slowly in tow, there’s a chance that March could mark the peak in both headline and core inflation.
With last year’s monthly changes from April to June for both the total and core CPI running in a raised 0.7%- to-0.9% range owing to reopening (apart from total CPI’s +0.6% in April 2021), this year’s annual changes should slow during these months (presuming we don’t get another pop in energy prices during the interim). However, the year-ago comparisons become less friendly during the third quarter (e.g., core CPI gains in the 0.2%-to-0.3% range), so for March to definitively mark inflation’s peaks, the shorter-term inflation trends must slow from their current clips. Both the three- and six-month annualized changes for the total CPI sported double digits. The core CPI was up 5.8% annualized in the past three months and 6.4% in the past six. To shed light on the prospects for ebbing shorter-term trends, we dig deeper into four major CPI components: energy, food, core goods and core services.
Energy prices popped 11.0% m/m in March, posting the second largest jump and only the second double[1]digit print since data started in 1957. (The 13.5% spike in September 2005 due to Hurricane Katrina was the largest.) This single-handedly contributed 0.85 ppts to the change in the total CPI (nearly 70%). Global crude oil and natural gas prices surged in the wake of Russia’s invasion of Ukraine on February 24. U.S. gasoline prices subsequently hit a record high of $4.33 per gallon on March 10 and stayed above $4 for the rest of the month (according to AAA). This resulted in an average gain topping 18% (seasonally adjusted). Other energy prices such as diesel fuel and heating oil both topped 22%.
Although April is continuing with gasoline prices topping $4, they are on track to register a slightly lower monthly average than in March. Meanwhile, Administration policy is attempting to keep a lid on, if not lower, gasoline prices. This includes releasing crude oil from the Strategic Petroleum Reserve and permitting higher ethanol content in gasoline sold during the summer driving season. Short of a major escalation of the war in Ukraine or sanctions on Russia, we may have seen the peak in gasoline prices. However, about 45% of the CPI energy component is energy services. Wholesale natural gas prices have continued grinding higher since the invasion and are now reportedly impacting (natural gas-generated) electricity prices, on top of their impact on retail natural gas costs. Energy services prices were up 1.8% in March.
Food prices jumped 1.0% in March, for the second consecutive month, posting the largest annual change since 1981 at 8.8% y/y. For the past 12 months, the monthly moves have remained in the 0.4%-to-1.0% range, with the latest three months at or just below the top. Ukraine and Russia are major global exporters of grains and oil seeds, and prospective supply shortages have pressured global and U.S. prices higher.
Unfortunately, across the continental U.S., the proportion of agricultural areas suffering abnormally dry or various degrees of drought conditions was 67% as at April 12, up from 63% this time last year. The share suffering extreme or severe drought conditions was 41%, up sharply from 22% a year ago. Precipitation levels could still pick up, but this points to little reprieve from high prices.
In March, it’s noteworthy that all the sub-components of food-at-home expenditures posted 1.0%-or-larger monthly moves, including: cereal and bakery products; meats, poultry, fish and eggs; dairy and related products; fruits and vegetables; non-alcoholic beverages and beverage materials; and ‘all other’ food-at-home items. This shows how ubiquitous the various forces driving food prices have been. Meanwhile, food away from home, at just under 40% of the CPI food basket, increased a benign 0.3%. With wages for bar and restaurant workers along with finished consumer foods shipped by processors both growing around 15% y/y, we reckon menu items are poised to see their prices accelerate. Excluding food and energy, the prices of core goods decreased 0.4% in March, driven by a 3.8% drop in used vehicle prices. If not for that latter drop (which was the steepest in 53 years), the core CPI would have increased 0.6% and kept to its prior five-month trend.
Vehicles are a prime example for how the mix of strong demand and constrained supply is inflating prices throughout the economy. With the global microchip shortage as a catalyst, strong demand for vehicles butted up against a constrained supply of new cars and trucks to push new product prices higher (March was still 12.5% y/y, a 47-year high). And, it diverted demand to the used segment, which also pushed used vehicle prices sharply higher (beyond 40% y/y at various points in the past year). The industry’s constrained supply also impacted parts prices (the latest 14% y/y readings are the highest since at least 1977) and caught rental companies flat-footed when the demand for rentals rebounded (rental cost growth topped 100% y/y last spring).
The global microchip shortage is steadily being remedied, which is improving the availability of new vehicles and parts and, in turn, easing the pressure on both new and used vehicle prices. Alongside the above-mentioned extreme drop in used car and truck costs, new vehicle prices moved up only 0.2% m/m in March after spending the final eight months of last year registering 1%-plus monthly moves. The remedying is also improving the availability of an array of other chip-dependent consumer products ranging from appliances to iPhones, thus ameliorating associated upward pressure on their prices.
Supply chain disruptions in core goods production extend beyond microchips, and these are also being remedied to various degrees. Owing to the war in Ukraine, sanctions on Russia and COVID-related lockdowns in China, some bottlenecks are being exacerbated, adding to upward price pressures. Nevertheless, we’ve long argued that stubborn supply bottlenecks are as much a symptom of strong demand as they are the consequence of pandemic-era supply chain disruptions. And come next month, the Fed appears poised to ramp up its efforts to dampen demand broadly in the economy.
The prices of core services increased at a 30-year high of 0.6% in March, partly pushed by a record-high 10% surge in airline fares as the latter continue adjusting to pre-pandemic levels amid strong seasonal demand.
The largest sub-components of core services are actual and owners’ equivalent rents (they weigh in at about 9% and 30%, respectively, of the core CPI) and they both increased 0.4% in the month. The rise in actual rents followed a large 0.6% increase in February, which matched a 44-year high, amid the tightest rental market since 1984 (which is the last time the rental vacancy rate was lower than its current 5.6%). The rise in OER marked the seventh consecutive 0.4% move, showing the most strength and consistency since 1990. These rent metrics mirror the strength in home prices, with more upward pressure potentially looming. However, mortgage rates have risen sharply lately, with 30-year tenors now quoted at just under 5¼% or their highest level since 2010. This is up around two percentage points since the start of the year, which will eventually weigh on home price appreciation.
Finally, for the prices of services generally, wage dynamics are an important driver. With key wage metrics growing at their fastest rates since the early 1980s, and businesses more emboldened these days to pass along their higher costs, this should keep services prices, broadly, under pressure.
Bottom Line: While March could indeed mark the peaks in inflation, the more important question is how quickly headline and core inflation will climb down. By the end of this year, we reckon the former will still be above 6% with the latter tucked under 5%. This is still more than double the pace the Fed would prefer, which is why we expect aggressive policy rate hikes are looming.
Read more
Michael Gregory, CFA
Deputy Chief Economist & Managing Director
Michael is part of the team responsible for forecasting and analyzing the North American economy and financial markets. He has spent his career working in either ec…(..)
View Full Profile >The CPI increased a massive 1.2% in March, fuelled mostly by energy prices. This hoisted the annual change six-tenths to 8.5% y/y, marking the fastest inflation rate since December 1981. Some 40 years ago, inflation was on a downswing following a near three-year run of double-digit prints. Now, it’s been on a huge upswing. For the past few months, the acceleration in inflation from its year-ago paces has been the most in more than 70 years (exacerbated by ‘base effects’).
Meanwhile, excluding food and energy, the CPI increased 0.3%, lifting core inflation a tenth to 6.5%, also a fresh four-decade high. However, this was less than expected, with a monthly move decidedly below the stubborn 0.5%-to-0.6% range of the previous five months. And, with crude oil prices already off their highs hit in the wake of Russia’s invasion of Ukraine, and gasoline prices slowly in tow, there’s a chance that March could mark the peak in both headline and core inflation.
With last year’s monthly changes from April to June for both the total and core CPI running in a raised 0.7%- to-0.9% range owing to reopening (apart from total CPI’s +0.6% in April 2021), this year’s annual changes should slow during these months (presuming we don’t get another pop in energy prices during the interim). However, the year-ago comparisons become less friendly during the third quarter (e.g., core CPI gains in the 0.2%-to-0.3% range), so for March to definitively mark inflation’s peaks, the shorter-term inflation trends must slow from their current clips. Both the three- and six-month annualized changes for the total CPI sported double digits. The core CPI was up 5.8% annualized in the past three months and 6.4% in the past six. To shed light on the prospects for ebbing shorter-term trends, we dig deeper into four major CPI components: energy, food, core goods and core services.
Energy prices popped 11.0% m/m in March, posting the second largest jump and only the second double[1]digit print since data started in 1957. (The 13.5% spike in September 2005 due to Hurricane Katrina was the largest.) This single-handedly contributed 0.85 ppts to the change in the total CPI (nearly 70%). Global crude oil and natural gas prices surged in the wake of Russia’s invasion of Ukraine on February 24. U.S. gasoline prices subsequently hit a record high of $4.33 per gallon on March 10 and stayed above $4 for the rest of the month (according to AAA). This resulted in an average gain topping 18% (seasonally adjusted). Other energy prices such as diesel fuel and heating oil both topped 22%.
Although April is continuing with gasoline prices topping $4, they are on track to register a slightly lower monthly average than in March. Meanwhile, Administration policy is attempting to keep a lid on, if not lower, gasoline prices. This includes releasing crude oil from the Strategic Petroleum Reserve and permitting higher ethanol content in gasoline sold during the summer driving season. Short of a major escalation of the war in Ukraine or sanctions on Russia, we may have seen the peak in gasoline prices. However, about 45% of the CPI energy component is energy services. Wholesale natural gas prices have continued grinding higher since the invasion and are now reportedly impacting (natural gas-generated) electricity prices, on top of their impact on retail natural gas costs. Energy services prices were up 1.8% in March.
Food prices jumped 1.0% in March, for the second consecutive month, posting the largest annual change since 1981 at 8.8% y/y. For the past 12 months, the monthly moves have remained in the 0.4%-to-1.0% range, with the latest three months at or just below the top. Ukraine and Russia are major global exporters of grains and oil seeds, and prospective supply shortages have pressured global and U.S. prices higher.
Unfortunately, across the continental U.S., the proportion of agricultural areas suffering abnormally dry or various degrees of drought conditions was 67% as at April 12, up from 63% this time last year. The share suffering extreme or severe drought conditions was 41%, up sharply from 22% a year ago. Precipitation levels could still pick up, but this points to little reprieve from high prices.
In March, it’s noteworthy that all the sub-components of food-at-home expenditures posted 1.0%-or-larger monthly moves, including: cereal and bakery products; meats, poultry, fish and eggs; dairy and related products; fruits and vegetables; non-alcoholic beverages and beverage materials; and ‘all other’ food-at-home items. This shows how ubiquitous the various forces driving food prices have been. Meanwhile, food away from home, at just under 40% of the CPI food basket, increased a benign 0.3%. With wages for bar and restaurant workers along with finished consumer foods shipped by processors both growing around 15% y/y, we reckon menu items are poised to see their prices accelerate. Excluding food and energy, the prices of core goods decreased 0.4% in March, driven by a 3.8% drop in used vehicle prices. If not for that latter drop (which was the steepest in 53 years), the core CPI would have increased 0.6% and kept to its prior five-month trend.
Vehicles are a prime example for how the mix of strong demand and constrained supply is inflating prices throughout the economy. With the global microchip shortage as a catalyst, strong demand for vehicles butted up against a constrained supply of new cars and trucks to push new product prices higher (March was still 12.5% y/y, a 47-year high). And, it diverted demand to the used segment, which also pushed used vehicle prices sharply higher (beyond 40% y/y at various points in the past year). The industry’s constrained supply also impacted parts prices (the latest 14% y/y readings are the highest since at least 1977) and caught rental companies flat-footed when the demand for rentals rebounded (rental cost growth topped 100% y/y last spring).
The global microchip shortage is steadily being remedied, which is improving the availability of new vehicles and parts and, in turn, easing the pressure on both new and used vehicle prices. Alongside the above-mentioned extreme drop in used car and truck costs, new vehicle prices moved up only 0.2% m/m in March after spending the final eight months of last year registering 1%-plus monthly moves. The remedying is also improving the availability of an array of other chip-dependent consumer products ranging from appliances to iPhones, thus ameliorating associated upward pressure on their prices.
Supply chain disruptions in core goods production extend beyond microchips, and these are also being remedied to various degrees. Owing to the war in Ukraine, sanctions on Russia and COVID-related lockdowns in China, some bottlenecks are being exacerbated, adding to upward price pressures. Nevertheless, we’ve long argued that stubborn supply bottlenecks are as much a symptom of strong demand as they are the consequence of pandemic-era supply chain disruptions. And come next month, the Fed appears poised to ramp up its efforts to dampen demand broadly in the economy.
The prices of core services increased at a 30-year high of 0.6% in March, partly pushed by a record-high 10% surge in airline fares as the latter continue adjusting to pre-pandemic levels amid strong seasonal demand.
The largest sub-components of core services are actual and owners’ equivalent rents (they weigh in at about 9% and 30%, respectively, of the core CPI) and they both increased 0.4% in the month. The rise in actual rents followed a large 0.6% increase in February, which matched a 44-year high, amid the tightest rental market since 1984 (which is the last time the rental vacancy rate was lower than its current 5.6%). The rise in OER marked the seventh consecutive 0.4% move, showing the most strength and consistency since 1990. These rent metrics mirror the strength in home prices, with more upward pressure potentially looming. However, mortgage rates have risen sharply lately, with 30-year tenors now quoted at just under 5¼% or their highest level since 2010. This is up around two percentage points since the start of the year, which will eventually weigh on home price appreciation.
Finally, for the prices of services generally, wage dynamics are an important driver. With key wage metrics growing at their fastest rates since the early 1980s, and businesses more emboldened these days to pass along their higher costs, this should keep services prices, broadly, under pressure.
Bottom Line: While March could indeed mark the peaks in inflation, the more important question is how quickly headline and core inflation will climb down. By the end of this year, we reckon the former will still be above 6% with the latter tucked under 5%. This is still more than double the pace the Fed would prefer, which is why we expect aggressive policy rate hikes are looming.
What to Read Next.
Inflation: Where Next?
Sal Guatieri | March 18, 2022 Economic Insights
“We have an expectation that inflation will peak and begin to come down this year. To the extent inflation comes in higher or is more persisten…
Continue Reading>
Tell us three simple things to
customize your experience.
