Inflation, Is The Worst Over?

U.S. inflation has gone from bad to worse. But the worst may be over. At least that's what Wall Street thinks following the release of the March Consumer Price Index (CPI) by the Bureau of Labor Statistics.

CPI, a measure of the cost of living for the average American household, rose at an annual rate of 8.5% in March. That's slightly ahead of market expectations and up from 7.9% in February. Both numbers are standing at a 40-year high due to the continued rise in the price of food and energy.

"Increases in the indexes for gasoline, shelter, and food were the largest contributors to the seasonally adjusted all items increase," said BLS. "The gasoline index rose 18.3 percent in March and accounted for over half of the all items monthly increase; other energy component indexes also increased. The food index rose 1.0 percent, and the food at home index rose 1.5 percent."

Meanwhile, "core CPI," which excludes food and energy from the calculations, rose 6.5%, slightly below expectations, suggesting that inflation continues to be a food and energy problem. However, housing inflation is beginning to contribute to the overall inflation.

Then there’s the Producer Price Index (PPI), a measure of inflation at the wholesale level, which rose at an annual rate of 11.2% in March, up from 10.3% in February, and ahead of market expectations. Both numbers are standing at 40-year high, too.

At any rate, the March CPI numbers confirm that America's inflation problem is getting worse, making it harder for the average household to afford the things it used to. "As we face the highest inflation levels in 40 years, it is critically important for middle-income families to understand how to budget, manage debt, save for the future and protect their incomes," said Glenn J. Williams, CEO of Primerica. "These priorities compete for limited financial resources, making the need for professional guidance more important than ever."

But is the worst over? Wall Street seems to think so, at least based on the initial reaction of both the equity and the credit markets following the release of the March inflation numbers. For instance, all major equity averages gained more than one percent, with the tech-heavy Nasdaq gaining 2%. Meanwhile, the 10 year Treasury bond prices rallied, sending bond yields 2.5% lower.

Still, predicting the end of the inflation run is tricky. Inflation is both a numbers game and a demand-supply game. As a numbers game, inflation is a cumulative change of the CPI, and therefore, it's expected to taper off. However, things become more complicated as a demand and supply game. Food and energy prices are determined by geopolitical factors like the Russian-Ukraine war, which are hard to predict. In addition, food prices are influenced by climatic factors, which are even harder to predict.

One good indicator of whether inflation is expected to get better or worse from here is how smaller businesses plan to adjust their prices to rising costs.

Kabbage from American Express recently released a Small Business Recovery Report, which monitors the state of U.S. small businesses. The report provides a few good insights as to how small businesses are adapting to a shifting market as they look beyond pandemic-wrought challenges and adjust for inflation. For example, they increased prices by 21% across industries, primarily due to increased costs from their vendors (54%) and raw materials (45%).

What about future price hikes? The majority plans to keep prices at these levels, according to the same report. "Looking ahead, 65% of businesses plan to keep prices at this inflated, current rate for the next six months, while nearly one in five (18%) said they plan to raise prices even more,” says the Kabbage report. “Combating increasing costs of their own is a primary contributor, and over half (53%) expect their business to be impacted by supply chain issues for the next three months to a year."

That's undoubtedly good news, as they will help inflation taper off. But, perhaps, Wall Street knows something American households have yet to find out.