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U.S. Inflation May Have Peaked

Published 07/08/2022, 06:42 AM
Updated 11/14/2023, 07:35 AM

Wall Street is on track for one of its worst years yet on record as the Federal Reserve hikes interest rates to combat 40-year high inflation, increasing the likelihood of a recession.

The Dow Jones Industrial Average is down 14.6% year-to-date (ytd), while the benchmark S&P 500 and the tech-heavy NASDAQ are off 19.3% and 27.4% ytd respectively.

DOW, S&P 500, NASDAQ Daily Chart

But there is some good news. Recent inflation data revealed that the rate of increase has moderated. The core personal consumption expenditures price index, which excludes food and energy prices and is the Fed's preferred metric for measuring underlying inflation trends, was 4.7% yoy in May, marking a deceleration from the 4.9% rate in April.

Core PCE Price Index

The reading has slowed for three months after peaking at 5.4% yoy in February. 

Indeed, signs are mounting that inflation has peaked and will decelerate further.

Falling Gasoline Prices

Record-high gas prices have significantly contributed to the rise in inflation. But gasoline futures are down more than 20% since June, stirring hopes that the sky-high price of gas across the U.S. will continue to slide.

RBOB Gasoline Futures Daily Chart

According to AAA, the national average gas price stood at $4.752 a gallon as of Thursday, down from the all-time high of $5.016 a gallon on June 14 and the drop in crude oil prices will likely lead to more relief at the pump.

Barring an unexpected surge in crude prices, gas could drop by an additional 60 cents to about $4.15 a gallon by mid-August.

Oil Drops Back Towards $100

Crude oil briefly fell below $100 per barrel earlier this week for the first time since April, underlining hopes inflationary pressure is starting to ease. On Tuesday it traded at $95.10, 26% lower than its high of over $130 on March 7. Prices have since staged a modest rebound but remain well off recent peaks.

WTI Crude Oil Daily Chart

Citibank is projecting that if the U.S. economy enters a recession, oil prices could drop to $65 per barrel this year and $45 per barrel next year.  

Commodities Are Sinking

Prices of wheat, corn, soybeans, and oats have plunged since reaching all-time highs. They are now trading below the level they were at before Russia invaded Ukraine in March, providing further evidence that food inflation is moderating.

Other agricultural commodities, such as cotton, sugar, coffee, and cocoa futures, are all down at least 20% from their recent peaks.

Additionally, copper, nickel, iron ore, aluminum, and lumber are all trading near their lowest levels since 2020.

Commodities 3-Month Performance

Deutsche Bank analyst Jim Reid wrote in a note on Wednesday that:

“[A] rolling 20-day move in [Deutsche Bank’s] commodity index is now seeing around the third-largest decline in 90 years.” 

DB Commodity Index Tracking Fund

Easing Global Shipping Rates

Ongoing improvements in global supply chains and easing shipping rates will also likely help inflation abate in the months ahead. 

The Baltic Exchange’s main sea freight index, which tracks rates for ships carrying dry bulk commodities, is down almost 40% from its recent high in May, indicating weak demand across all vessel segments. It is hovering around its lowest levels since early April. 

Baltic Dry Index Daily Chart

Collapsing Input, Output Costs

According to the latest release of the IHS Markit PMI survey, input cost and output price inflation rates eased in June. 

The increase in both manufacturing and service sector costs was sharply lower than May’s all-time high, and the weakest reading since February.

The reduced rate of increase in input costs bodes well for CPI, given the close historical correlation between the two indices.

U.S. CPI/PMI Input Prices


Latest comments

This was wrong
Well,why back in 1980s Paul Walker needed to raise the rate to 20% to knock down the inflation to 2% from 13%, while in 2022, we can knock down the inflation from 8.6% to 2% with rate be raised to between 3.5% to 4%? Do we have magics in 2022? What is different between now and then? As what I know, now we have over $30 T of debt and kept going up, for each 1% of rate hike we need to pay additionl $300 b of interest each year which will limitted the ability of FED to raise rate to fight inflation, and we have overly printed paper money of $7 T which is part of the cause for the high inflation, but in time when paul walker to fight inflation in 80s , we did not have all the above
Several small businesses I normally use (roofing companies, Asphalt paving, framers, land clearing, etc). are seeing business drying up.  Exact same response from the group, "no one is planning new work" and in some cases , planned work has been postponed or cancelled.  I'd say that this is a same sampling of businesses right now in the US.
Baltic index is always interesting. Take a look at what it did in 2077-2008
what 2077~2008?
Recession ain't happening anytime soon unless you missed this morning's wickedly high Jobs report creation #s + unemployment rate staying historically low.Also, CITI terribly invested Russia, and Morgan Stanley, JP Morgan. Goldman all smarter divestiture there, the latter 3 all are 140+ oil this year, JP is.....320
recession never start with high employment
I sense the ghost of Paul very afraid!
I believe there will be a rate of 1.25 max and for minimum 1.00.
"Peaked" doesn't necessarily mean we'll decline anytime soon.  Today's employment report was slightly stronger than expected which could mean continued demand and high inflation, and also gives the FOMC clearance to keep hiking rates until they do break the labor market.  Just looking at diesel prices (which are much more relevant to commercial energy cost) suggests leveling off of prices which will cascade to continued high CPI/PPI and another 75bps hike at end of month.
Very informative article. Thanks
tócame el pijo
I appreciate , thanks
jeaaah right
great article thanks
Someone writes this every month for over a year now…
Lol nope. Were about to enter the “return to normal” part of this market where denial is widespread but it wont last. Were in for a doozy
I strongly doubt it. False hope is a tactic for the market as we all know.
Are labor costs going to fall and wages reverse I don't think so.
Hi I'm Jesse Cohen, I have 279 articles on here and I have never been right on any of them.
It's so easy to end, it's too powerful, when will prices and housing prices fall sharply?
my man inflation has only begun wait till December gets here the pain will be awful and I'm being polite
time to get real! economy is not printing monetary policy...
inflation may have peaked.... hello? do you know that is 300,% higher than it should?
Look up the word peaked.
carrying the bull flag....the Dow is down 17 ....but went up 40 on a handful of nothing....
So no rate hike and everything is solved nice
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