Is Inflation Peaking?
A 1.2% rise in the Consumer Price Index last month was the biggest increase since 2005, according to the U.S. Bureau of Labor Statistics. Given the spike in energy tied to the Russia-Ukraine war, March’s inflation report was no surprise.
But is the rate of inflation peaking?
A 0.3% rise in the core CPI, which excludes food and energy, was cautiously encouraging. But it’s too soon to judge whether March’s number was a turning point.
The core CPI came in light thanks to a 3.8% decline in used car and truck prices.
But services, which account for over 60% of the CPI (U.S. BLS), rose a troubling 0.7% last month. It was the largest increase in 15 years.
Furthermore, the Producer Price Index, which measures inflation at the wholesale level, also accelerated (U.S. BLS).
Demand-pull, cost-push
Economists usually cite two reasons for inflation: demand-pull and cost-push.
Demand-pull inflation is generated as strong demand for goods and services outpaces the ability of businesses to provide those products and services. Therefore, prices rise.
Cost-push inflation occurs amid higher prices or shortages of raw materials. In turn, businesses pass along those higher prices to consumers.
Today, we’re experiencing both. If we turn the page back to the initial lockdowns, non-essential businesses closed and most of us stayed at home.
When the economy began to reopen, consumers, who were flush with stimulus cash, started spending, but reopening manufacturing facilities at home and abroad remains a challenge.
A year ago, the Wall Street Journal detailed the problems a Utah factory faced as it cranked out hot tubs.
“Parts come from seven countries and 14 states and travel a cumulative 887,776 miles to make one hot tub, the company estimates,” the Wall Street Journal said. At the time, it could take up to “six months for a customer to get a hot tub, up from a few weeks before the pandemic.”
Problems in the supply chain are still with us. Given the drawn out manufacturing process, you can see how parts and labor shortages can gum things up.
The Fed has little control over the supply chain, the shortage of semiconductors, or rising food prices. But it can deal with demand-pull inflation by lifting interest rates and slowing down economic growth, which could help to re-align demand with supply.
