Is Inflation Peaking? – Coronado Times

9.1%. That’s the number many investors are focused on as we head into the middle of summer. 9.1% is the year-over-year percentage change in the Labor Department’s Consumer Price Index (CPI), which, every month, measures the prices of a basket of goods and services. Broadly speaking, the CPI measures inflation, and this June number, reported this past Wednesday, is the largest increase since November 1981. While the U.S. (and the rest of the world) face significant financial hurdles in the months and years ahead owing to clogged global supply chains and the fallout from the Russian invasion of Ukraine, inflation is perhaps the most salient challenge. The Federal Reserve really needs to get ahead of inflation before it does too much damage to the savings and confidence of both American businesses and consumers.

Tall Order

Jerome Powell and the Fed face a difficult task. How do they rein in inflation to protect the purchasing power of Americans’ savings while also not sending the economy into a tailspin, and do so using the blunt instrument of interest rate adjustments? Raising rates certainly puts a damper on growth, but it also works with a lag. Changes made today take several months their impacts to be felt the economy. With the hot June inflation reading, the Fed will almost surely raise the Fed Funds rate by at least another 0.75% at their meeting in late July and may even raise it by a full percentage point. While the goal is the “soft landing” of seeing inflation cool off while keeping the economy from tipping into recession, the Fed has tightened policy too much on several occasions and thereby helped to foment economic downturns.

Investors’ Big Wish

High inflation doesn’t do anyone any good, so even investors are rooting for the Fed to supply enough bitter pills (in the form of rate hikes) to quell surging inflation. There is no good choice: it’s between high inflation or a much slower (possibly shrinking) economy. Most investors, including this one, will choose the latter. So investors really want to see a Fed that is clearly dedicated to taming inflation, but they also sorely want to see at least nascent results of the Fed’s efforts in the next couple of months. It is clear, in hindsight, that the Fed waited too long to act, but it is now catching up quickly.

Hopeful Signs

The difficult 9.1% June inflation reading notwithstanding, there are mounting signs that the rate of inflation will slow in the coming months. The Bloomberg Commodity Index is down about 18% from its 2022 highs, with Brent crude oil off about 20%, lumber down by nearly half and copper down by a third. Prices for agricultural products, as measured by the S&P GSCI, are down around 25% from two months ago. Gasoline prices, a big contributor to the June inflation number, have fallen about 8% in the last month. Home price appreciation has also slowed markedly in a number of markets as offers dry up and the number of unsold properties begins to climb, albeit…