Tuesday’s inflation report contains both good and bad news.
- The bad news: Consumer prices rose by a shocking 8.5% last year, a rate not seen in more than 40 years.
- The good news: That number has probably gotten as high as it can get and may be coming down soon.
What you say: Inflation “has likely peaked,” Bank of America analysts said on Tuesday. Her colleagues at Capital Economics agreed, saying the 8.5% figure would mark “the peak” for the series.
How it works: Headline inflation, which rose 1.2% in March alone, was mostly driven by energy prices. Core inflation, which excludes food and energy, was relatively muted, rising just 0.3%.
- The forthcoming April inflation report promises good news: Oil prices have fallen to $94 a barrel from a peak of $124 on March 8th.
- fuel prices have tracked oil prices down. The US median price of $4.08 is down 6% from $4.34 in early March, per GasBuddy.
Be smart: Base effects play a big role when looking at year-on-year inflation figures.
- At the moment we are coming to the end of the period in which we compare prices that have been artificially depressed by the pandemic – and we will soon be comparing prices that have reached artificial highs thanks to global supply restrictions.
The other side: Given the volatility and unpredictability of wartime oil prices, any explanation that inflation has peaked is necessarily “preliminary at best,” RSM’s Joe Brusuelas wrote in a research note.
- If for some reason Europe stops importing oil and natural gas from Russia, that alone could send energy prices skyrocketing again.
What’s next: The Fed will continue to raise interest rates throughout the year. The central bank is trying to ignore volatile food and energy prices, but core inflation is 6.7%, well above the Fed’s 2% target.
- Higher interest rates are already evident in the mortgage market, where 5% mortgages are now commonplace. That should help slow house price inflation.
The bottom line: We could move from high and rising inflation to high and falling inflation. It’s better, but it’s still not great.