- Inflation hit a 41-year high in March, but several signs hint that the US could be past the peak.
- Certain inflation measures showed underlying inflation trends cooling through early 2022.
- Other indicators like inflation expectations and shipping prices have shown similar improvement.
The first signs that US inflation is starting to wane have emerged.
Prices throughout the economy have surged at an extraordinary pace for more than a year now as demand dramatically outstripped supply. Russia’s invasion of Ukraine provided the latest boost, driving commodity prices sharply higher and power headline inflation to the fastest pace in 41 years. The economy is healing at a decent pacebut soaring prices are still making Americans pessimistic.
The worst of the inflation problem, however, might be over. Several factors behind the nationwide price surge have eased in recent weeks, offering the first signs that the US could be past peak inflation. If relief is in the cards, it will take some time before price growth returns to normal. Yet these indicators hint the US economy could soon take steps in the right direction.
The Fed’s favorite inflation gauge cooled slightly in March
Economists measuring US inflation have two indicators to pick from: the Consumer Price Index and the Personal Consumption Expenditures index. The Fed uses the “core” PCE index, which strips out volatile food and energy prices, as its go-to inflation measure, and data published Friday shows the gauge pulling back ever so slightly.
The core index climbed 5.2% in the year through March, the Bureau of Economic Analysis announced Friday morning. That reflected a minor deceleration from the 5.3% pace seen the month prior. It also landed just below economists’ forecasts.
The month-over-month reading gave even clearer hints of deceleration. Core PCE rose just 0.3% through March, practically matching the February pace and holding below the 0.5% upticks posted from October to January. The one-month reading is generally more relevant to forecasting future price growth, as the year-over-year measure is affected by where inflation sat in the year-ago period.
The Dallas Fed’s inflation tracker is even more encouraging
Headline inflation indicators remain the benchmarks for nationwide price growth, but there are several measures that aim to better predict the underlying trends lifting prices.
Among them is the Dallas Fed’s trimmed-mean price index, which excludes the wildest price swings each month and averages the remaining price changes. This method of calculating inflation aims to look past short-term price drops and surges and instead uncover the fundamental dynamics either accelerating or cooling price growth.
The March reading for trimmed-mean inflation signals those dynamics are easing fast. One-month trimmed-mean PCE inflation slowed to a 3.1% annual pace from the 4.0% jump seen in February. The measure suggests inflation actually peaked in January, when trimmed-mean inflation hit a one-month annual rate of 6.3%.
Americans aren’t bracing for higher inflation
Inflation might have Americans feeling sour about the economic recovery, but they aren’t all that worried about the price-growth problem getting worse. That’s a hugely encouraging sign: When consumers anticipate higher inflation, they can up their spending in hopes of getting deals before prices climb. That surge of demand can boost price growth further and spark a vicious cycle of growing inflation fears and ever-higher prices.
New data suggests that’s unlikely to happen in the current environment. Citi’s US Inflation Surprise Index, which measures the degree to which inflation data exceeds or falls below estimates, has declined dramatically in recent weeks, signaling inflation expectations have already hit their peak. The drop could be a precursor to cooler price growth, James Paulsen, chief investment strategist at The Leuthold Group, said in a Thursday note.
“Throughout this recovery, inflation surprises led the current inflation rate higher — so a decline now is an encouraging sign,” he added.
The New York Fed’s Survey of Consumer Expectations flashed a similar signal in March. Respondents’ expected three-year ahead inflation rate slid to 3.7%, summarizing a downward trend and marking the second-lowest expected rate since July. Americans, it seems, aren’t too worried that inflation will stick around.
Shipping rates are past their peak
Much of the US’s inflation problem is directly linked to the global supply-chain crisis. Shipping delays, supply shortages, and production bottlenecks reverberated throughout the world economy in 2021 and have yet to fully heal. That’s kept businesses unable to match supply with demand and under greater pressure to hike prices.
Yet one of the biggest factors roiling supply chains is easing up. Shipping rates have been on the decline since September, and the downtrend has accelerated in recent weeks. It now costs roughly $8,955 to ship a 40-foot container of freight, according to the Freightos Baltic Index. That’s the lowest since mid-July and down from March highs of nearly $10,000.
Higher shipping rates typically drive higher inflation across the board, as they affect all kinds of goods and tend to be passed on to consumers. Lower rates, therefore, should ease that widespread inflation pressure as well as strains in the global supply chain.