November CPI inflation was predictably ugly, perhaps a bit less ugly than feared. Inflation over the past year has accelerated across most everything, but the biggest culprits have been surging cost of gasoline, home heating and vehicles.
But November will be the peak in inflation. Gasoline and home heating costs have fallen sharply in recent weeks, and with supply chains settling, vehicle production is off bottom, and prices should roll over early next year.
At root, the higher inflation is due to the supply-side disruptions caused by the pandemic, especially the Delta wave of the pandemic. As the pandemic recedes – each wave is less disruptive than the previous one – inflation will moderate.
Inflation by this time next year will be within spitting distance of the Federal Reserve’s inflation target.
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The more I digest the inflation data, the more convinced I become it is peaking and will be decidedly lower by this time next year. Gas and most goods prices will fall by then, and the normalization of prices for services will be over.
The histrionics over inflation rest on a wage-price spiral. But wage growth is up only for low wage workers, who will return to work as the pandemic recedes and they spend their excess savings. Stronger productivity will also help.
Higher inflation expectations is also necessary for a spiral. But they are currently precisely where the Fed wants them. Look at 5-year, 5-year forwards, 10-year TIPS inflation break-evens, and my favorite, the Phila Fed survey of economists.