Is U.S. inflation peaking?

April 25, 2022

On the latest edition of Market Week in Review, Chief Investment Strategist for North America, Paul Eitelman, and Director of Client Service, Chris Kyle, discussed the U.S. inflation numbers from March, recession risks and recent equity and bond market performance.

U.S. CPI rises by 8.5% in March. Could this be the peak?

Kyle noted that on April 12, the U.S. Department of Labor reported its consumer price index (CPI) jumped by 8.5% in March, on a year-over-year basis, making for the largest increase since December 1981. This reading was just the latest in a string of red-hot inflation reports in the U.S., Eitelman said, with the March number driven higher by a spike in food and energy prices.

“The war in Ukraine has led to disruptions in gas markets and global supply chains,” he observed, noting that elevated commodity prices alone caused a two-percentage-point impact on headline inflation. Core inflation, which strips out the more volatile food and energy sectors, rose 6.5% on an annual basis, Eitelman explained.

On a more optimistic note, he said the March CPI report probably represents the peak of inflation in the U.S., with some signals emerging that pricing pressures are likely to begin easing. For example, prices for durable goods—including automobiles—declined in March, Eitelman said, noting that this sector was a big culprit behind the rapid spike in inflation last summer. “This was an encouraging development, and I think we’ll continue to see pressures moderate in this sector as more economies fully reopen,” he stated.

However, Eitelman cautioned that inflationary pressures still look troublesome in other categories, especially shelter inflation—i.e., the cost of housing. In addition, the strength of the U.S. labor market has led to a sharp rise in wage inflation, he noted, with the Atlanta Fed’s wage tracker up 6.0% in March. “Some of the services categories that are the most sensitive to wage inflation are also looking pretty hot right now,” he added. Ultimately, while Eitelman believes inflation will start to cool, he noted that the U.S. Federal Reserve (Fed) still has plenty of heavy lifting ahead as it tries to move inflation back closer to its 2% target by raising rates.

Could the Russia-Ukraine war or tighter Fed policy spark a recession?

Kyle and Eitelman shifted the conversation to an analysis of recession risks through three lenses: corporate earnings, the Russia-Ukraine war and Fed tightening. Early results from first-quarter earnings season, which kicked off the week of April 11 with reports from some of the big banks, don’t appear concerning at the moment, Eitelman said.

“Most banks have been beating consensus estimates, and we think U.S. S&P 500 companies are on track for an earnings growth rate of around 7% in the January-through-March period,” he stated, remarking that although this would be lower than the phenomenal growth rates seen during much of 2021, it would still be a positive number.

Meanwhile, the Russia-Ukraine war—a humanitarian tragedy of untold proportions—has the potential to dampen consumer spending through rising commodity prices, Eitelman said. “So far, while there’s been some pressure on energy prices, the spike hasn’t been big enough to really knock down the U.S. or European consumer,” he observed, adding that there hasn’t been an interruption of natural gas supplies to Europe either. Ultimately, from Eitelman’s vantage point, while the conflict in Ukraine is leading to some economic headwinds, he doesn’t see it as a significant recessionary risk.

In Eitelman’s opinion, the Fed’s pivot toward higher interest rates to corral inflation makes for the largest recession risk. “We’re starting to get later in the business cycle now, and this does create some vulnerabilities when it comes to more elevated recession risks—particularly in the second half of 2023 and beyond,” he stated.

Global equities slump amid rising rates

Turning to recent equity and bond market performance, Eitelman noted that most major asset classes were moderately down during the holiday-shortened trading week of April 11. In particular, the selloff in U.S. government debt continued, he said, with the yield on the benchmark 10-year Treasury note rising from 2.7% to 2.8% at week’s end.

The higher interest rates helped feed into some of the negativity in equity markets as well, Eitelman remarked, with the MSCI All Country World Index off roughly 2% through April 14. “In the U.S., which has more exposure to higher rates than other markets, equities generally lagged their European and emerging-market counterparts too,” he observed. All in all, the week was reflective of the broader downturn in both equity and bond markets that has largely defined 2022 so far, Eitelman concluded.