Could Inflation Be Entering A Higher Regime?

Goods versus Services

Before we think about the hypothetical new world order that global inflation may enter, let’s start with the good news within the United States. The Federal Reserve’s (Fed) preferred measure of inflation, the core PCE deflator, is slowing on a year-over-year basis. As shown in the LPL Chart of the Day, the May core PCE deflator rose 4.7% from a year ago. The annual growth rate slowed for the third consecutive month after reaching a high of 5.3% year-over-year in February. “Inflation is still stubbornly high and far above the Fed’s long run target of 2% but the deceleration in the core rate is encouraging,” explained Jeffrey Roach, Chief Economist at LPL Financial.

Price conditions in the U.S. are best understood by breaking out goods inflation from services inflation and the rate of inflation seems to be cooling for durable goods.

Auto prices continue to moderate as growth rates for motor vehicles and parts slowed for the fourth consecutive month. Used auto prices rose at the slowest pace since May 2020 and as supply bottlenecks improve, the car market should begin to revert to pre-COVID behavior.

Recreational goods and vehicle prices were flat from a year ago, as high gas prices are slowing demand for recreational vehicles.

However, a major concern for the Fed is the surge in travel-related demand is pushing services inflation up. Consumer prices for housing, restaurant, and accommodation services are reaching new highs as consumers release pent up demand for travel and housing costs react to the recent hot real estate market.