Inflation in March was mostly driven by categories already reverting in April
March 2022 inflation metrics soared to highs last seen in December 1981, when the S&P 500 Index was at 123 (versus a little under 4,500 now) and the 10-year Treasury yielded 13.9%. Unfortunately, geopolitical tensions were high back then too, especially in Beirut, Lebanon. After rising 1.2% from a month ago, prices are now 8.5% above last year and over 11% above March 2020.
Gas, shelter and food prices were the largest contributors to the monthly gains. Gas prices alone accounted for over half of the monthly increase, rising 18.3% in March, but this spike was temporary. As of April 11, the AAA national average of retail regular gas price already declined roughly 25 cents from the highs on March 10.
What categories will lead the way in releasing pricing pressures?
Gas prices is one component already releasing price pressures. As growth expectations slow, Russian sanctions squelch Putin aggression, and oil supply recovers, we expect gas prices to moderate. Another category to revert will likely be new and used vehicles, but supply chains must unclog before a meaningful reversion in prices is sustained. Used car prices fell 3.8% in March but are still 35.3% above a year ago and over 48% from March 2020. As global trade and shipping ports improve, auto manufacturing could likely get a respite. As more cars come on the lots, consumers will have more available options and dealers will have more comfortable inventory levels, providing relief in the strained car market. As shown in the LPL Chart of the Day, starting in February 2016, new and used vehicle prices declined for over two years while the economy continued to grow. This is definitely a “goldilocks” scenario as prices cooled off without a hard landing.
Food prices have also historically led the way in periods of slowing inflation. Along with the period of declining vehicle prices, meat prices also moderated. Consumer confidence will improve as food prices moderate, providing a boost to the consumers’ budgets.
Inflation is possibly at the top but the cool down period could be painfully slow.
Recent inflation pressures originated from Russian military action in Ukraine. As sanctions developed, prices rose in the energy and commodity markets and quickly trickled down to consumer goods. But in addition to these geographical conflicts, earlier pandemic lockdowns and subsequent reopenings contributed to the initial spike in prices in almost all categories, including food, recreational equipment, and household goods. “The cool-down period for consumer prices may take a long time. Supply chains are still clogged, consumers have pent up demand for services, and the pool of available workers is small,” explained Jeffrey Roach, Chief Economist at LPL Financial. The good news is historical pricing pressures have eased before in this country without pulling the entire economy into recession.
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