Inflation continues to soar, dominating conversation and stretching consumer wallets. Last week’s inflation data saw consumer prices up 8.5% year over year, the most since the early 1980s, while producer prices were up 11.2%, the most ever. What can the Federal Reserve (Fed) do? Will it ever stop? Is this the 1970s all over again? There are many question, but we do see some potentially good signs.
“Although many fear the light at the end of the tunnel is indeed an oncoming train, we think there are some clues that inflation could be near a major peak and the move lower could be sudden, at least for durable goods” said LPL Financial Chief Market Strategist Ryan Detrick.
Here are three reasons inflation could be near a peak.
First up, cars and trucks. Few industries have been hit by the pandemic and supply chains issues as hard as the auto industry. The chip shortage has made getting a new car nearly impossible, so the price of used car and trucks has soared. Just two months ago the price of a used car was up nearly 45% year-over year (Manheim Used Care Value Index), but the past two months it has come down to ‘only’ 24.8%. In fact, the month-over-month decline the past two months has been 2.1% and 3.4%, showing some signs the excessive used car pricing could finally be cracking. Given used cars and trucks make up four percent (ok, 4.038% to be precise) of CPI (Consumer Price Index), this could be a big clue inflation is nearing a major peak.
Next up not all inflation is equal. The Atlanta Federal Reserve breaks inflation down into ‘sticky’ and ‘flexible.’ As the name would suggest, sticky inflation is a weighted basket of items that change price relatively slowly. Think things like motor vehicle fees, education, public transportation, and motor vehicle insurance. Whereas flexible inflation contains things that move more often, like motor fuel, apparel, dairy, and jewelry.
As the LPL Chart of the Day shows, during the 1970s we saw both sticky and flexible core inflation soar, but thus far only flexible core inflation has moved significantly higher during this bout of inflation. Could this mean that flexible inflation could come back down just as quickly?
The final reason inflation could be near a major peak is the major backlogs we’ve seen at various ports is finally thawing. The ports of Los Angeles and Long Beach backlogs are nearing September 2021 levels, while the cost of shipping is also coming down and very quickly.
In fact, shipping rates from Shanghai to LA, New York, or Rotterdam are down 28% on average from the peak last year. Shipping rates were between $1,000 and $3,000 pre-pandemic, so there could be a long ways for this to continue to fall and it won’t happen overnight, but this is another very positive clue that inflation could be nearing a major peak.