For the first time in roughly four decades, the U.S. inflation rate hit 8.5% last month, the highest reading since 1981. Month over month, inflation climbed 1.2% in March. While prices are still rampant, there are hopes that inflation has peaked. Both Wall Street and Main Street are hoping that is the case. The inflation forecast for 2022 might be less dire than a lot of headlines today are claiming. Let’s dig into it.
Each month, the Consumer Price Index (CPI) sheds light on inflation. For years, the Federal Reserve struggled to keep inflation afloat, but lately, we’ve had the opposite problem. Rising inflation costs — be it at the grocery store or at the gas pump — have been weighing on discretionary spending and consumer sentiment.
However, there have been several factors at play here. Supply chain problems have created shortages in many key products, like lumber and semiconductors. That in turn, has fueled a shortage in housing and the car market. Geopolitical concerns have driven up already demand-hungry markets, like wheat, fertilizer, oil and natural gas, among others.
But is that rise about to unwind?
The Federal Reserve is raising interest rates, which could cool asset prices a bit, including housing. However, we’re seeing inflation cool in other areas, too. While still elevated, trucking rates have been under pressure. According to the Manhiem Used Vehicle Index, the used car market has also decreased over the last couple of months. Lastly, while commodities are still in a bullish trend — like materials, oil, wheat, etc. — most have pulled back significantly.
That’s not to say that prices are not still elevated. However, all of these small improvements imply that we may be on the way down from peak inflation. A well-respected stock researcher named Ophir Gottlieb recently wrote:
Alas, there is reason to believe that disinflation has begun. And while some of it is simply a return to equilibrium, some of it too, has been brought about by aggressive Fed signaling.
We believe that the Fed, while serious about tightening policies, is also attempting to scare the economy out of inflation with purpose driven messaging. The demand side of inflation may have its cure in that messaging, and the supply side is easing now too, likely simply due to a return to normalcy.
Finally, well-respected investor and fund manager Jeffrey Gundlach, who runs DoubleLine Capital, said that inflation has likely peaked. Those comments came after the CPI report this morning, although he said that pricing pressures will still be a problem for the Fed and believes rate hikes are still in order.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
