The answer to the title question is no, not quite, even with the deepening slide in a broad array of commodity prices. The coming June U.S.CPI release is expected to show another meaty monthly rise, probably lifting headline inflation to nearly 9%. And then the yearly comparisons turn a bit more difficult in the summer, as there actually was a brief lull in inflation a year ago. However, the slide in oil prices, in particular, raises the tantalizing possibility that inflation could top out soon, and—more importantly—perhaps even recede faster than expected in the year ahead. Clearly, much more than oil will determine whether inflation is finally close to cresting, but there are a variety of indicators now heading south. However, peaking is one thing; central banks will want to see inflation coming down markedly in the next 18 months. Below we consider the medium-term outlook based on a range of indicators.
Non-energy commodity prices: Perhaps the most encouraging signal that inflation may be peaking is the pullback in a broad array of commodity prices. Many are now lower than levels prevailing before the invasion of Ukraine, including industrial metals and even many grains. After sprinting to a record high in March, a basket of non-energy commodity prices has since tumbled 20% and is barely above year-ago levels (Chart 1).
Supply chain pressures: While far from normal, supply chain issues are improving. Some of the most visible signs (ships waiting at sea), and some of the less visible (supplier delivery delays) are backing down to much more normal levels (Charts 2 and 3). In part, this reflects some moderation in demand for goods, as consumer spending rotates back to services, which could more broadly take the steam out of durables prices. Still, the FOMC Minutes from June revealed that the Fed believed that any improvement was not yet sufficient to help contain inflation.
Retail inventories: Some large U.S. retailers are seeing rising inventories, amid earlier order padding and as consumers have pulled back on some purchases, leading to sporadic discounting. Ex-auto retail inventories were up 20% y/y in May, a huge move.
Freight rates: Even with still-strong fuel costs, shipping rates have moderated notably. For example, the Baltic Exchange’s Container Index, which measures rates on 12 major routes, is off more than 40% from last fall’s peak and is also down 14% y/y.
Used vehicle prices: After leading the initial charge in U.S. inflation a year ago, used vehicle prices are stabilizing, if not even edging lower. While they are still up 11% y/y in the latest readings from Manheim, that’s down from 40% y/y gains earlier this year.
BMO’s inflation indicator: Our in-house metric of short-term inflation pressures has moderated in the past three months (albeit at a still-high level), after peaking in March. The indicator compiles 12 different measures of key inflation drivers, and is showing a clear topping process, after blasting higher through 2021 and into early this year.
Expectations: While the levels and the details may differ, almost every major measure of inflation expectations—consumer and business—has lurched unnervingly higher in recent months (Chart 4). Indeed, Chair Powell cited such as a key factor driving the decision to hike by an outsized 75 bps in June. The risk is that the sustained bout of inflation over the past year has already shifted expectations, potentially on a lasting basis.
Wage pressures: Even amid mounting recession concerns, job markets remain extraordinarily tight. The June jobs reports sported some of the lowest unemployment rates in generations, U.S. job openings are above 11 million (about double the number of people officially counted as unemployed), and hiring plans remain robust. Meantime, wage gains—while strong and rising—are still trailing well behind headline inflation (Chart 5). Suffice it to say that this is a recipe for hefty wage increases in the year ahead, keeping the flame squarely on underlying inflation pressures, especially in the service sector.
Rents: Even with a moderation in the housing market, the rollicking strength of the past year and a tightening vacancy rate point to further upward pressure on rent. For the CPI, the effect may only be beginning in earnest now, as the owners’ equivalent rent measure (which alone accounts for a massive 23.7% of the CPI basket) tends to lag home prices by up to 18 months (Chart 6). In other words, even with moderation now, there is still plenty of sting in the tail for inflation from the jump in home prices over the past two years.
Energy prices: The recent pullback in crude oil and refined product prices raises the tantalizing prospect that even energy costs are now past the peak (Chart 7). However, there is still the risk of a snapback (as seen many times this year), and even with the deep dive, prices are still well up from pre-invasion levels. And the sag in North American natural gas prices mostly reflects the outage at Freeport LNG, and not any fundamental changes, while gas prices in Europe continue to run amok. Energy prices may well be the ultimate deciding factor on whether inflation has indeed peaked, given its outsized role in both the global economy and consumer inflation psychology.
Food prices: Right next to energy in driving headline inflation and expectations has been the double-digit rise in grocery prices in the past year (Chart 8). Over the near term, food prices are likely to remain hot, with further pressure from high transport prices and rising labour costs compounding underlying commodity strength in the sector. However, on the latter point, there are some encouraging signs that crop prices are moderating—after an initial spike in the wake of the Ukraine invasion. While the jury is very much out on this year’s North American crop, early indications are positive, and at least better than 2021’s tough drought conditions across the prairies.
The verdict: All told, there’s not enough relief in sight for inflation just yet, and certainly not enough for the Fed to back off anytime soon. In fact, even with a sharp retreat in gasoline prices in July, we still look for headline inflation to hold close to 9% y/y in the summer, before relenting somewhat later this year (Chart 9). The risk for policymakers is that the longer such meaty readings fester and affect wages and consumer psychology, the tougher it will be to crack expectations. Finally, getting past the peak of inflation is just the start of the job for central banks. After all, if inflation peaks but then eventually settles around, say, 5%, then the job is only half done.