Have We Hit Peak Inflation?
Inflation accelerated in March, as the consumer price index rose 8.5% on an annual basis and 1.2% on a monthly basis, the Labor Department announced Tuesday.
It was the highest reading since inflation picked up in the wake of the pandemic, surpassing February’s 7.9% annualized increase, and the biggest since 1981. Gasoline, the price of which soared during March in the wake of Russia’s invasion of Ukraine, was the largest single contributor to the overall inflation level, accounting for more than half of the monthly increase.
Core inflation, which subtracts volatile elements such as food and fuel, rose a more modest 6.5% on an annual basis – lower than overall inflation, but still the highest reading in four decades.
Have we reached a peak? The monthly core inflation reading in March was 0.3%, the lowest level since September, which translates to 4% on an annual basis – higher than the 2% target of the Federal Reserve but well below the 10% annual rate some analysts have predicted. This provides some support for those who think March could represent a peak, with inflation easing during the rest of the year. Gas prices have come down significantly in April and used cars – the prices of which have soared during the pandemic as a result of a shortage of new cars – are finally getting a bit cheaper.
“Barring further severe disruptions, the March release is likely to be the peak in terms of year-over-year rates for both headline and core given that the base effects from last year’s surge in used car prices will begin rolling off in the April data,” analysts at Deutsche Bank predicted earlier this week. Analysts at Bank of America, Morgan Stanley and UBS said Tuesday that they think March will likely be the peak month.
Additionally, the Fed plans to raise interest rates more aggressively and start withdrawing liquidity from the economy, which should further reduce inflationary pressure in the coming months.
Still, there are serious concerns about inflation lingering, with the price of services beginning to rise, taking the place of goods as the primary driver of price increases. “We have been at this juncture before where subtle shifts within the data make it appear that the level of inflation has reached its peak for the cycle only to keep marching higher,” Charlie Ripley of Allianz Investment Management said, according to Politico’s Ben White. “Going forward, the greater concern is really around how entrenched inflation has become as Americans continue to worry about rising prices.”
Blerina Uruci of T. Rowe Price warned that problems in the supply chain, one of the primary drivers of inflation, are still an issue. “The other red flag is Russia’s invasion of Ukraine and the rise of Covid in China. Those pose risks that the so-called normalization of supply chains takes longer to materialize,” she told The Wall Street Journal.
Manchin points a finger: Whether inflation is at a peak or not, Sen. Joe Manchin (D-WV) on Tuesday blamed the Biden administration and the Federal Reserve for failing to act quickly enough in response to price increases throughout the economy.
“Let me be clear, inflation is a tax and today’s historic inflation data tells another chilling story about how these taxes on Americans are completely out of control,” Manchin said in a statement. “The Federal Reserve and the Administration failed to act fast enough, and today’s data is a snapshot in time of the consequences being felt across the country. Instead of acting boldly, our elected leaders and the Federal Reserve continue to respond with half-measures and rhetorical failures searching for where to lay the blame.”
The West Virginia Democrat also called for less deficit spending and a comprehensive energy policy to address inflationary pressures. “Here is the truth, we cannot spend our way to a balanced, healthy economy and continue adding to our $30 trillion national debt. Getting inflation under control will require more aggressive action by a Federal Reserve that waited too long to act,” he said. “It demands the Administration and Congress, Democrats and Republicans alike, support an all-the-above energy policy because that is the only way to bring down the high price of gas and energy while attacking climate change.”
The comments could signal that Manchin has little intention of helping Democrats revive their Build Back Better social investment plan, which would increase public spending by trillions of dollars over 10 years. Manchin has cited inflation as a primary reason for not supporting the spending plan, and even a bill discussed by Democrats that fully offsets the proposed expenditures and provides some deficit reduction at the same time may not convince him to change his mind.
