What is the near-term outlook for inflation?
Last month’s consumer price index (CPI) reading of 8.5% was the largest since December 1981. Price increases were exacerbated by the Russia/Ukraine conflict, as commodity prices spiked, with higher gas prices accounting for much of the CPI increase last month. The question is, where will inflation head from here?
Forecasts suggest moderation in the months ahead but for inflation to remain above the Fed’s desired 2.0% target for some time. Core inflation, which strips out food and energy, actually decelerated to 0.3% in March, as prices for used cars, electronics, and other products increased more slowly or declined outright — a positive development illustrating some improvement in strained supply chains. Future readings should also benefit from a more favorable base effect, which reflects the difference between prices today and one year ago. 2020 price levels reflected price declines for many goods and services as the economy went into lockdown; once the economy reopened and demand surged, so did prices. Looking ahead, year-over-year comparisons will be made relative to those higher post-opening prices. The chart above illustrates this base effect assuming three scenarios: (1) prices remain unchanged over the rest of the year; (2) price increases are in line with average monthly rate over the past five years; and (3) price increases are comparable to the monthly rate over the past 12 months. Scenario 1 (a sharp decline to 2 to 3%) is unlikely; prices will continue to rise in the months ahead. Scenario 3 also appears unlikely, as supply side improvement, tighter monetary policy, and cooling demand should help to ease the imbalance.
Bottom line: Inflation is expected to peak this year, but a return to the Fed’s 2% inflation target will take time. For now, the Fed will stay hawkish until inflation returns to a more tolerable range.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.