The first 8%-plus inflation rate in over four decades is igniting renewed debate in financial markets over whether the U.S. has already reached the height of its feverish spell in price gains.
Broadly speaking, Tuesday’s consumer price index report, showing annual headline inflation jumping to 8.5% in March, was enough to give both sides of the argument some ammunition. One camp cites the report’s finer details, like a tame 0.3% monthly core measure that kicks out food and energy, to reach the conclusion that inflation has likely peaked. The other side sees room for price gains to keep going further as the result of non-U.S. factors, like China’s COVID-19 shutdowns and Russia’s war in Ukraine.
The financial market’s initial reaction to the CPI report was to focus on the positives, which suggest inflation may start to ease: U.S. stocks
rallied before giving up their gains in the afternoon, while most Treasury yields edged lower as investors factored in prospects that inflation could fall. Investors and traders appeared less concerned about the hot headline number, driven by higher gas and energy prices, and were more focused on the monthly core gauge, which came in at a below-expected 0.3% and was helped by a drop in the cost of used cars.
This wouldn’t be the first time the monthly core gauge has fallen off in the past year only to be overshadowed by a soaring annual headline rate down the road: The monthly core measure also fell off from last July to September, hovering at or below 0.3%, just as the then-year-over-year headline rate of 5.3%-5.4% was about to keep jumping for months to come.
“We are witnessing history right in front of our eyes today,” Rick Rieder, BlackRock Inc.’s
chief investment officer of global fixed income, wrote in a note. “Predicting where we would have been today several months ago would have been next to impossible, particularly given some of the exogenous shock to the system we’ve witnessed.”
“We are witnessing inflationary conditions that would have seemed like fantasy (or, more rightly, nightmare) merely a few months ago,” Rieder said. “Indeed, today’s CPI report portrayed some very daunting numbers of much higher prices than a year ago, and the report displayed little prospect of decline in the near-term.”
Here is a rundown of the views held by financial-market participants and economists, derived from their research reports and emails on Tuesday:
Inflation Has Probably Peaked
- “There’s not much to like in today’s CPI figures,” said Matt Peron, director of research at Janus Henderson Investors. “The best you can say is that core CPI came in lower than expected at ‘only’ 6.5%” on a year-over-year basis.
- “That might give some relief to markets which were preparing for the worst,” Peron said. “The key now is whether inflation has peaked, and if so, at what pace will it decline. While this reading probably locks in a more aggressive Fed action near-term, there is some reason to believe that CPI will decline enough by year-end to avoid the most severe Fed action. Indeed, that would be our ‘mid-cycle slowdown’ scenario, which remains our base case by a thin margin.”
- Though inflation likely peaked in March and gasoline/food prices could stabilize in the next few months, “high inflation will be with us at least through the summer because increases in other prices, especially shelter and services, will be sticky,” said Robert Frick, corporate economist with Navy Federal Credit Union. “So far, though, Americans continue to spend, and are playing catchup in categories such as restaurants and travel with plenty of savings and low household debt overall.”
- “Rent inflation appears to be easing a bit, and the buildup of retail inventories is finally dampening goods inflation. Those are positive developments which increase the odds that inflation has in fact peaked,” said Jefferies economists Aneta Markowska and Thomas Simons. However, “while today’s report is encouraging, the Fed is a long way away from claiming victory and will have to remain in inflation-fighting mode.”
Inflation Has Room to Run
- “The drivers of inflation are changing, but price increases are still running historically high,” said Bill Adams, chief economist for Comerica Bank. “Even with durable goods inflation moderating, overall price increases are going to get worse before they get better … The surge in energy prices will ripple across the economy in coming months and push inflation in other categories of goods and services higher. Food prices in particular are at risk of continued rapid increases because of Russia and Ukraine’s roles as global grain and fertilizer suppliers.”
- “The March report shows some moderation in core CPI, month over month. However, we expect continued price pressure due to the lockdowns in China as the supply chain struggles to normalize,” said Mace McCain, president and chief investment officer at Frost Investment Advisors. “We believe the high headline numbers will keep the Fed on the path of rate increases and the reduction in the balance sheet that has been clearly communicated. We’re hoping the moderation of core inflation will allow the Fed to eventually pause near the neutral rate at end of the year and possibly avoid pushing the United States into a recession.”
- Inflation “has not yet peaked because expectations are looking more entrenched,” said Ben Emons, managing director of global macro strategy at Medley Global Advisors. He cited one indicator which he says shows “the median 1-year ‘prediction’ of inflation is running at 8 percent.”