After a year of crushing price increases, economic signals suggest that US inflation is finally – albeit slowly – cooling off. Yet experts say the worst is behind us, the improvement may seem modest for millions of Americans, and the road to normality is likely to be a long one.
When the government releases its latest consumer price index on Tuesday, economists expect prices in November to be up only 7% from a year earlier – down from 9% in June. That’s still more than triple the Federal Reserve’s preferred rate of inflation, and analysts expect it will take a year — or more — for inflation to subside completely.
“It’s fair to say that inflation has peaked and the worst is behind us,” RSM chief economist Joe Brusuelas recently told CBS MoneyWatch. However, he added, “We’re not going to see a sharp or sharp decline in overall inflation. Getting back to the Fed’s 2% inflation target is going to take some time, and it will take some very difficult policy decisions.” ,” They said.
The Fed missed that target badly last year when it mischaracterized inflation as a temporary phenomenon. And while its aggressive rate hikes this year have tamed inflation, economists say it could take years before prices fall by 2%.
The reasons are complex, but come down to the interplay between goods and services, wages and prices. While supply-chain issues and the consumer buying frenzy that drove most price increases during the pandemic have mostly abated, consumers are still spending and workers are still getting huge raises. Some economists warn that could create a repeating cycle in which workers expect inflation to accelerate, causing them to demand higher wages.
“It’s been a long hard slog for price stability,” Oxford Economics wrote earlier this fall.
signs inflation is slowing
While it took months longer than economists predicted, commodity prices everywhere are slowing.
Last month saw the biggest drop in online prices in nearly three years, according to Adobe. Although some of the decline was driven by retailers who became overstocked — offering deep discounts to clear inventory — the trend is broader.
“We also see signs of a cooling of overall e-commerce inflation,” according to Patrick Brown, vice president of growth marketing and insights at Adobe. “In categories like groceries and personal care, which are not promotional in nature, we are seeing price increases coming down from their highs in late summer and early fall.”
Gasoline, a key driver of inflation this year, has fallen from $5 a gallon in June to an average of $3.26 a gallon, the lowest price in a year. The price of diesel has also been falling, although slowly – a promising sign given the fuel’s importance in shipping most goods.
Supply-chain bottlenecks have been addressed to a large extent. Some economists also hope that China’s conditionLockdowns and disruptions will be less likely in the future.
Big-ticket prices are falling
Large, high-priced items that were largely behind price increases last year are coming back down. The cost of used cars has been on a steady decline since peaking a year ago, according to private data as well as the government’s official price tracker, the Consumer Price Index.
,[S]Braving this summer, Americans fueled their rampant demand for goods and were motivated to spend more on services, as these industries were no longer constrained by government social distancing restrictions. Inflation rates for used cars and trucks, furniture and bedding, and home appliances have declined in recent months.”
On the other hand, new cars continue to set price records, suggesting that vehicle markups will be sharply reduced shortly before car dealerships.
Another factor that should continue to drive CPI higher next year is rent. According to several private data providers this has less to do with the ongoing rent increase – which is falling – and more to do with the government factors in the cost of rent.
While the Labor Department measures most properties every one or two months, it only records rental data twice a year, explained Paula Munger, economist at the National Apartment Association. “So they won’t have complete data until the end of the year,” she said.
The lag between real-world rents and rents shown in the CPI means that government data will not show a decline in rents until sometime next year.
,[I]It will be some time before the recent softening in private estimates of rent demand via the CPI eases, Deutsche Bank economists wrote in a recent research note.
Can wages keep rising?
Another factor that could keep consumer prices relatively high over the next few months is wages. While economists, wary of a “wage-price spiral,” have been pushing for wage growth to slow, worker wages last month moved in the opposite direction, rising at an annual rate of 5.1%.
So far, wages have not been the main driver of inflation. Supply-chain issues and a boom in consumer spending have pushed them up. But with Americans spending less on goods and more on services, wages are likely to play a bigger role in the inflation picture. In service sectors – from hospitality to transportation services – labor costs are often the largest component of what a customer pays.
,[W]Currently-age contracts appear to be more in line with an environment where CPI inflation is closer to 5% than to the Fed’s 2% inflation target, TD Securities economists said in a report.
Wage increases, while good news for workers, can be bad for consumers if they lead to price increases. But it’s not a given that they will. Companies that have been freely passing on price hikes for two years are beginning to see resistance as people and other companies are holding back.
“Our own data from our own surveys tells us that firms are now finding it difficult to pass on their customers to the downside with price increases,” Brusuelas said.
“Profit margins are starting to come down… Hiring is starting to slow. You can see all the signs of the end of the business-cycle. It’s all inflation driven,” he said.