Rising prices — especially for food — are grabbing headlines, but the course of the Covid-19 pandemic, the war in Ukraine, slumping consumer demand, and supply chain disruptions are all feeding into an exceedingly muddy economic picture. Yet when it comes to food and commodity inflation, the worst may be over.
Last week, the Labor Department reported wholesale prices rose by a near-record 11.3 percent and consumer prices by 9.1 percent for the year ending in June. “With inflation up 9+ percent from a year ago, the typical household must shell out almost $500 more a month to buy the same things they bought a year ago. That’s $6k more a year, which is a big deal for a household making about $60k per year,” Mark Zandi, chief economist at Moody’s Analytics, tweeted Monday.
Food prices jumped by 10.4 percent in the year ending in June in the consumer inflation report. The impact is very real, especially among young adults, who are facing the highest rates of food insecurity among all adults. Food costs are not the only factor in this equation, since higher prices for rents, gasoline and a range of other goods also pinch wallets.
But that situation may moderate ahead. As Zandi said, “I took solace that energy and food accounted for fully 5 percentage points of the inflation. And energy prices have fallen a lot since June and appear set to fall even more as the fallout of Russia’s invasion on oil, natural gas, and ag markets fade.”
“Lots could still go wrong, but odds are we will feel better with the July and subsequent CPI reports,” he said.
The flip side of inflation, of course, is recession, since the Fed’s desire to decelerate the economy with higher interest rates is already taking its course. The question now is how much more of this medicine is needed. Although markets were recently predicting a 1 percent jump in short-term interest rates at the Federal Reserve’s policy meeting next week, traders have since dialed back expectations, with talk of a more moderate bump.
That’s because there are signs growth is slowing globally, with oil demand easing back. The S&P global commodity index is down nearly 20 percent from a peak in early June. U.S. inflation has also been tempered by the 20-year high in the dollar, which makes imports less expensive.
Importantly, inflationary expectations are also moderating. Although seven out of every 10 large-scale farmers and ranchers expect high inflation to persist into 2023, according to a recent survey, consumers are more sanguine. The widely followed University of Michigan consumer sentiment survey last week reported that consumers expect 2.8 percent inflation over the next five to 10 years, the lowest result since July of last year. Panic buying on fears that prices will be even higher down the road has been noticeably absent. Indeed, there are signs that slower economic growth is causing fatter inventories, which could temper price gains ahead.
Factors that prompted the high inflation rate, such as spiking consumer demand for goods during the pandemic, supply chain disruptions, and soaring shipping rates, have all dropped back from their peaks last year. The question, of course, is whether this a momentary decline, or a return to normality. Recession, again, plays a key role.
“Most economists are now projecting a better than even chance that the U.S. will be in recession by mid-2023,” economist Dan Kowalski of CoBank said in a recent report. “We echo those projections, and while agriculture and energy are likely to continue performing well due to the Ukraine conflict, several other sectors will slow in coming months, just as the Fed intends.”