Inflation: How Bad Will It Get?
Inflation has turned from a transitory to a permanent problem, making life more expensive at home and abroad. But how bad will it get?
This week, the U.S. government will release new retail and wholesale inflation data for March.
On Tuesday, the Bureau of Labor Statistics (BLS) will report the March Consumer Price Index (CPI), a measure of inflation at the retail level. Markets expect the CPI to run at an annual rate of 8.3% in March. That's up from 7.9% in February and another record since January 1982.
On Wednesday, the BLS will release the March Producer Price Index (PPI), a measure of inflation at the wholesale level. Markets expect the PPI to run at an annual rate of 11%, up from 10% in the previous month.
Again, that's the highest wholesale inflation has been since 1982.
The usual suspect behind these ugly inflation numbers is food and energy price hikes, evidenced by the gap between overall vs. core inflation, excluding food and energy. For instance, March's core CPI is expected to run at an annual rate of 6.7%, almost two points behind the overall CPI. Likewise, core PPI is expected to come at 8.8%, more than two points below the overall PPI.
And the situation is expected to worsen as the critical factors driving food and energy price higher remain intact.
"The Russia-Ukraine situation is not getting better, said Sankar Sharma, the founder of RiskRewardReturn.com. “OPEC+ not planning to increase the supply, it is not easy to increase the production locally within the U.S. in six months. Oil is likely to go higher up within the next six months. Wheat, corn, and sunflower shortages are going to push the prices up. Not all companies can absorb the rising costs of raw materials. So, businesses will be compelled to pass it on to the consumer. All this means inflation could go even higher, and the taming process needs to start urgently."
A report from the U.N. Food and Agriculture Organization (FAO) released last week portrays a blinking picture for essential food supplies like palm and soy oil.
"In the meantime, palm, soy, and rapeseed oil prices also rose markedly, buoyed by rising global import demand in the wake of sunflower oil supply disruptions," the FAO said. "Moreover, while world palm oil values received additional support from lingering supply tightness in major producing countries, soy oil prices were underpinned by concerns over reduced export availabilities in South America. Noticeably, volatile and higher crude oil values also lent support to international vegetable oil prices."
Nonetheless, in a research note out last week, Deutsche Bank expects March inflation to signal a peak.
"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 April data," the note read.
That would be a sign of relief for Wall Street, which closely follows the inflation numbers to figure out the pace of the Fed's monetary tightening.
"The Fed has a window of opportunity now to go for a 50 -75 basis points rate hike," said Sharma. "If the Fed chooses to go with 50 basis points instead of 75, it is likely we will see the following interest rates also be at 50 basis points to tame the inflation tiger."
In addition, Wall Street will closely follow the retail sales numbers to be released later in the week to determine whether the economy has slowed down as inflation has begun to take its toll on consumers, complicating the Fed's job.
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