Despite consumer prices hitting a new four-decade high last month, the latest data show several signs that prices may be moderating slightly, with economists now predicting that inflation may have peaked—though they warn prices will likely remain elevated into next year.
Though consumer prices spiked 8.5% in the 12 months ending in March, core inflation—which excludes volatile food and energy prices—rose 0.3%, slightly lower than expected and leading some Wall Street experts to predict that inflation may have finally peaked.
“It’s possible that inflation could be topping out,” as there were definitely some “green shoots” in the data, says Lindsey Bell, Ally’s chief markets & money strategist.
“Consumer inflation likely peaked in March as the Russian invasion caused a sharp spike in food and energy costs,” says Nationwide senior economist Ben Ayers, adding that while prices should “slowly fade from here,” they are likely to remain high through 2022 and into 2023.
“This is likely near or at the top of the price gains,” says Beth Ann Bovino, chief U.S. economist for S&P Global Ratings, though she warns, “the path back to normalization will take longer.”
Moody’s Analytics chief economist, Mark Zandi, similarly argues that inflation could now be close to reaching a high point: “It feels like we’re topping out,” he says, though the next few months will be “tough,” with the odds of a recession at one in three.
However, some believe that even with a small decline in the core reading last month, inflation could still surge higher—with food and shelter prices, in particular, expected to keep rising: “Make no mistake, these readings are still very high relative to recent history,” warns Bespoke Investment Group.
“Even with durable goods inflation moderating last month, overall price increases are going to get worse before they get better,” says Bill Adams, chief economist for Comerica Bank. “Inflation will weigh on consumer sentiment and consumer spending power in 2022 and 2023, a big reason why we forecast U.S. real GDP growth to slow to 1.9% next year from 3.2% this year.”
Stocks initially rallied Tuesday morning despite the red-hot inflation report, with the Dow Jones Industrial Average rising as much as 300 points. The market gave up its earlier gains and turned negative later in the day, however, as nervous investors now brace for tighter monetary policy from the Federal Reserve.
Rising food and energy prices, reflecting the shock from Russia’s invasion of Ukraine, accounted for most of the surge in prices last month. The Federal Reserve, which hiked interest rates by 0.25% for the first time since 2018 in March, still faces an uphill battle trying to combat inflation. Economists from Bank of America predict that the central bank will raise interest rates by 0.50% three times this year, and while inflation may move lower from here, food prices in particular will “remain hot throughout the year.”