Inflation in the United States has started to cool year on year due to falling gas prices, but economists are looking for further evidence that the slowdown in price increases will become more widespread and pronounced.
So far, policymakers are getting good news, but the data is far from conclusive.
Here are a few positive developments, a few worrying signs, and a major looming uncertainty that analysts will be watching closely in Tuesday’s CPI data and the months ahead.
gas and other raw materials. Falling prices at the pump have dragged down annual inflation and some food prices have also fallen, which could eventually filter through to retail prices. This is good news for consumers, who tend to be sensitive to transportation and grocery costs. But for Federal Reserve officials, lower gas and food prices would be a welcome but not crucial development. As these costs bounce, central bankers tend to look past them when trying to get a feel for where inflation is headed.
cars and other physical products. A more meaningful positive development is taking place in commodity prices, which are showing the first signs of cooling. In particular, used car price hikes, which helped fuel the inflation that started last year, are slowly starting to recede. Commodity inflation is slowing in part because consumers are shifting spending away from products they bought during the pandemic and back to services like dining out and vacations. That’s also in part because supply chain issues that have plagued manufacturers for more than a year are showing signs of abating, though not back to normal.
Not so good news
Services linked to the labor market. Even as price increases for some goods are easing, prices for services — including the cost of dining out or hiring childcare — have risen rapidly. This could continue as these prices are closely linked to wages, which have risen in particular due to a strong labor market with low unemployment and labor shortages in many areas.
Rent. The most important service category is rent-related costs, which account for almost a third of overall inflation. For the time being, economists are assuming that housing costs will continue to rise sharply. There are too few apartments, especially since renters are reluctant to buy houses in view of rising mortgage interest rates. And a sharp rise in rents over the past year is still slowly adding to inflation.
War and Disruption Risk. Economists have repeatedly predicted that inflation would be on the verge of a slowdown, only to crush those expectations. In fact, inflation fell briefly last summer before rebounding in the fall. With the war in Ukraine still stoking uncertainty about supply chains and commodity markets, central bankers may hesitate to declare victory over inflation. And even if inflation begins to ease, a key question is how much will inflation slow down?
“The more important question for the Fed isn’t, ‘Has inflation peaked?’ It’s, ‘What’s the goal?’” said Aneta Markowska, chief financial economist at Jefferies. She believes that without a significant slowdown in economic growth, bringing annual gains back below 4 percent will be difficult. That would be far more than the 2 percent annual average targeted by the Fed.