The rise of inflation in the USA to levels not seen in 4 decades put high pressure on consumers and, subsequently, on businesses as well. Supply chain issues, elevated fuel prices, an energy crunch worldwide, and rising political uncertainty are just some of the factors that managed to revive inflation in 2022.
However, despite the fact that core inflation continues to be around the highs, headline inflation, (or CPI) has been showing signs of easing since October. Expectations are more optimistic going forward and also about the December figures, mainly because the factors that have been driving inflation up are now waning.
Average Fuel Prices
One of the key inputs for American families and businesses is the price of fuel. Several months ago, gas was selling above $5 a gallon in multiple states, forcing consumers to redirect their spending. The situation improved and now US gas prices are heading toward $3, providing short-term relief.
Since oil prices (WTI) have dropped from $129 to $77 (at the time of writing), the effect is certainly felt at the pump. Moreover, global demand for oil has been lower than expected, on the back of economic restrictions in China, and economic pressures faced by emerging markets.
Volatility in the energy space is not expected to dissipate anytime soon according to market analysts, but at least for now, US fuel prices act as a drag on headline inflation. Final figures will also depend on food prices, housing, and costs for services, yet there are reasons to believe inflation has peaked.
Supply Chain Disruptions Fading
When the pandemic originally erupted, supply chains were definitely impacted. Goods need to be transported from the production place to the end user. Freight rates and container costs rose significantly, putting upward pressure on retail prices.
By the time of writing, supply chains managed to improve and thus costs have moved down. The Baltic Dry Index is communicating that as well, as fewer ships are waiting in line across major ports such as Los Angeles.
China’s “zero COVID” policy and geopolitical tensions might weigh on supply chains next year. In the near term, that doesn’t seem to be the case, which is why this is another reason to believe that December inflation figures can continue to surprise on the downside.
Weaker Economic Activity
Looking back on the past, every period with high inflation has been followed by an economic contraction or recession. Also, there is no instance in the last 80 years when inflation continued to go up, while the economy was going down.
Poor economic activity is disinflationary, or even deflationary. If expectations turn out to be true and the US economy is about to slow substantially, that further reinforces the peak inflation narrative.
The next CPI print will be released on December 13th, one day before the Federal Reserve meeting ends. Analysts currently expect the MoM reading to slow to 0.3%, so any figure below that mark shall be regarded as another sign of a slowdown in inflation.
