Did Inflation Peak Yesterday? Possibly, but It Will Stay Elevated

INFLATION WON’T STAY above 8% this summer — if for no other reason than more favorable year-over-year comparisons which will begin to kick in. Yesterday’s bond market rally seemed to indicate that the inflation threat may ease soon, based on just one data point — core inflation rose by only 0.3% in the last month.

WE’D LOVE TO JUMP ON THE BANDWAGON and conclude that the threat has peaked, but there are two reasons to be cautious:

First, the war in Ukraine will not end soon. Vladimir Putin asserted yesterday that negotiations have run their course, with Russia prepared to fight until a “full conclusion.” Eastern Ukraine is in grave danger but an assault on Kyiv could last for months, keeping upward inflationary pressure on fuel and food; the latter may experience high inflation well into the summer.

Second, the U.S. labor market will stay red-hot. With a jobless rate of 3.6% now, perhaps headed lower, it appears that full employment has arrived. And there are still acute shortages of workers (truck drivers in particular) that will crimp the supply network and force employers to raise wages and benefits. Full employment could persist for many months.

BOTTOM LINE: We wouldn’t be surprised to see inflation gradually decline to 4% by late this year, a great improvement over this spring, but still not low enough for the Fed. By a year from now the Fed’s bitter medicine should cool off prices — and the overall economy.

BUT WE WON’T BELIEVE INFLATION HAS TURNED A CORNER until the war is over and the labor market has cooled off — and those two crucial ingredients do not appear to be imminent.

Related: Still A Bear Market Rally? Or, Is The Bull Back?

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