Inflation Pins and Needles
The S&P 500 closed at a new low on Thursday of 3,930, marking a drop of 18% since the start of the year, before rallying on Friday. Investors continue to be rattled by inflation, and the potential that the Federal Reserve’s actions to curb inflation will slow the economy too much and result in a recession. Accordingly, investors are on ‘pins and needles,’ watching for signs that inflation is peaking, selling off as inflation surprises to the upside. However, there are a few signs that inflation may be hitting a peak, a development that could be positive going forward.
Certainly, prices are continuing higher, but markets are focused on the rate of the change. If the pace of change slows then markets could react favorably and vice versa. To that end, there are already signs that inflation may be hitting a peak. One way to measure whether inflation is decreasing is to compare the short-term, annualized 3-month rate of change with the longer-term 12-month rate of change. If inflation is slowing, then we should see the annualized 3-month change lower than the 12-month change. That is exactly what we see in inflation overall and in the underlying components of inflation through the month of April.
One of the key drivers of inflation this past year was the prices of durable goods, things like autos, appliances, equipment, tools, etc. The prices for these types of items grew by 10.2% over the past year but slowed to 2.5% for the 3 months ended April. A few of the key changes in the short-term include New Autos, which rose 13.1% over the past year, but have slowed to 2.5% over the past 3 months. Similarly, prices for Used Autos, which rose 33.5% over the past year, dropped by -27.3% over the past 3 months.
On the other hand, the 3-month rent inflation of 6.6% was well above the annual rate of 4.4%, showing that there is still more pain to come in this area. On balance we expect that the market will remain volatile, but we are cautiously optimistic that inflation will begin to recede in the coming weeks, which could help calm some of investor’s fears.