Inflation Is Peaking, But How Low Will It Go?

Summary & Key Takeaways

  • Yes, inflation is peaking. But, what really matters for the market and for investors is the stickiness of inflation.

  • Goods inflation has peaked and will drag CPI materially lower in the months ahead.

  • Base effects are still a tailwind for services inflation, the leading indicators of services inflation generally have significant and variable lags, and wages are yet to roll over to any material degree. This is a recipe for sticky services inflation.

  • Don’t expect a Fed pivot until services inflation is under control. We are not there yet. Investors will do well to position their portfolios accordingly.

Has inflation peaked?

I don’t think I am going out on a limb by stating inflation has now peaked in the US and across much of the developed world, at least on a headline basis. Whilst services inflation continues higher, energy, food and goods inflation is rolling over. If we examine inflation through the lens of not just headline CPI, but Core CPI, Sticky Prices CPI, Trimmed Mean PCE and Core PCE, these measures confirm this dynamic. We can see below how headline inflation pressures have likely peaked, but, the stickier measures of inflation are yet to materially inflect lower.

We can further breakdown the recent drivers of inflation by examining the relative contribution of services (both shelter CPI and ex-shelter services CPI), goods, energy and food prices. This is illustrated below. The glaring observations are that the recent inflection lower in headline CPI has come about as a result of a deceleration in both energy prices and goods prices. Commodity inflation (ex-food and energy) peaked in Q1 this year, while energy inflation looks to have peaked around the beginning of Q3. Food inflation also appears to be peaking as we speak, but, services inflation on the other hand looks to be accelerating still.