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Could inflation pressures finally be easing?

Inflation had been consistently building since early 2021, but recent data suggests that some relief may finally be in sight.

Underlying drivers of inflation rolling over chartAfter lying dormant for more than a decade, inflation has reemerged as a significant economic concern globally since early 2021. A look under the hood shows the sources of higher prices have been broad-based (as the chart illustrates) but predominantly a result of surging costs for food, energy, and goods — many of which were in high demand and short supply due to snarled supply chains. More recently, services price increases have accelerated as consumer demand has perked up.

The most recent headline CPI reading showed a moderate improvement from June’s reading, largely due to the substantial dip in gas prices since mid-June. Whether that holds remains to be seen; energy prices will be a wild card, although the slowing global economy should reduce the risk of a retracement to recent highs. More broadly, goods inflation has softened as supply chain normalization, falling commodity prices, lower consumer demand, and a growing need for retailers to clear out inventory to make space for more inbound stock have helped to ease the imbalance.

What of the Fed? There’s no question the Fed is now fully focused on inflation — a message that Chair Jay Powell unequivocally reinforced in his brief but direct speech at the Fed’s recent Jackson Hole conference. Since the start of the year, monetary policy has swiftly moved from loose to neutral, with near-term rate hikes poised to further tighten policy into a range the Fed deems restrictive. It’s a sign that policymakers believe that the economic slowdown already underway is a start, but more will be needed to loosen employment conditions and return inflation back to (or at least meaningfully toward) its 2% target. Investors are listening and appear to be buying in. Market pricing for the 5-year breakeven inflation rate has come down from 3.6% in March to 2.7%.

The path to a more normal inflation environment may take longer than anyone would have hoped, but a return to greater price stability finally appears to be underway.

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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.

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