Everyone talks about inflation these days because everyone in some way experiences it.  We have written about it here over the last year and a half, with one of our first posts in April 2021 (see here).  In that April 2021 post, we give a short primer on what inflation is.  We concluded then that inflation was already baked into the system.  Since then, it has risen drastically.  Now let’s look at our current inflation situation to get a sense for whether it is being tamed or does it still have a life above 8%.

Picture inflation as a ‘pressure’ within the economy.  We can look at ‘pressure points’ in sectors of the economy where that inflation impacts people most and see if we are overcoming it.  Here are a couple sectors we found informative.

July Inflation.   Price increases moderated slightly in July.  In the CPI, gasoline prices fell, moderating the monthly rise.  The core CPI, which excludes fuel & food prices, did continue to rise, but at a slower rate than previous months.  The PPI, or wholesale inflation, report shows inflation easing at the early stages of production.  This bodes well for lower consumer inflation later this year.

Housing.   The issue in housing, including rental units, is a supply shortage.  Too much money, too few goods, rising prices.  It appears there is relieve in some sectors of housing later this year.  In the geographic markets that are most in need, 420,000 apartments are scheduled to come on the market this year.  The cost to own a home rose to the point where people decided to leave the market for a while, pushing down demand.  Recent data show housing prices are falling in some areas, but in general are not rising very fast.  Other encouraging signs:  More houses on market and for more days.  Mortgage demand is down considerable.  

It took a couple years to get housing to this point and will take at least a year or two until we see balance in that market.

Food.   Recently we are seeing snippets about food prices moderating or falling.  Unfortunately, the weather may limit crops in the US so we could see food prices come down some, but start to increase again in 4Q22.  Beef prices are coming down as the slaughter rate is high, increasing current supplies.

Inflation Expectations.   The best cure for inflation’s inflation!  Consumers are rapidly adjusting their purchasing patterns to fight their inflation experience by buying less, changing the mix of what they buy and where they buy from.  In doing so, demand for the more expensive items drops and prices will come down again.  Several surveys, such as the University of Michigan Consumer Sentiment Survey, are starting to show consumers feeling more comfortable about the economy and that inflation pressures in the economy are beginning to moderate.  This expectation will persist and form the foundation for the success of the Fed’s inflation fight.

Inflationary pressures in the economy seem to be easing even before the Fed’s tightening begins taking hold.  Over the next year those policies will start showing up in the monthly inflation readings by further dampening demand.  Then we wait and see-will that cause the economy to go the other way into a recession?