Is stubbornly persistent US inflation on the brink of a sharp recession? Some vague signs point in that direction. For one thing, wholesale prices have remained low and suggest that inflation is easing faster in the economy’s guts. Import prices, meanwhile, have fallen sharply since last summer. And consumers also expect inflation, surveys show. Prices are still rising too fast, of course, to ease the heavy financial burden on Americans or to ease the Federal Reserve, the agency tasked with keeping inflation under control. The Fed has been raising interest rates to curb inflation, adding to consumer woes. The central bank is expected to raise rates again next week. “Inflation is still somewhat sticky, and that’s why we believe the Fed is tightening more,” said Giampiro Fuentes, an economist at Raymond James. To wit: The cost of living, as measured by the Consumer Price Index, has risen sharply by 6% over the past year. While the inflation rate is down from a 40-year peak of 9.1% last summer, prices are still rising more than three times faster than in the decade before the pandemic. The Fed aims to bring inflation back to its 2% a year target, but the central bank also thinks it could take a few years to reach its target. Can inflation fall even faster than that? Wall Street DJIA, -1.19% SPX, -1.10% Economists believe it is possible. They point to an easing of global supply-chain disruptions that contributed heavily to the outbreak of the worst inflation in decades in 2021. As supply moves more freely, price growth has slowed. High interest rates also play their part in slowing the economy, he points out, especially in rate-sensitive areas like housing. Home sales and construction have slowed due to high mortgage rates. The sudden collapse of California’s Silicon Valley Bank may, for its part, have led to a credit crunch in which US financial institutions reduced lending to protect their own interests. Less credit generally slows demand and eases upward pressure on prices. Signs of slower inflation are most evident in US wholesale prices. Changes in wholesale spending are indicative of changes in consumer inflation, as the accompanying chart shows. The so-called producer price index peaked last summer at an annualized rate of 11.7% and has slowed sharply since then. Wholesale spending fell for the second time in three months in February, pulling the annual increase down to 4.6%. The last time wholesale inflation was this low was about two years ago. “The decline in producer prices in February has periodically trickled down to consumer prices and helped moderate consumer inflation in the coming months,” said Scott Anderson, chief economist at Bank of West. Shows more progress. Consumer prices are largely determined by these costs. Prices of partially finished goods have fallen in seven of the last eight months and have risen just 2.1% over the past year. These prices peaked at an annual rate of 26.6% about a year and a half ago. Raw material prices have also fallen sharply since last fall. Prices are down 11% over the past year. True, the reversal in higher oil prices since last summer has helped moderate inflation. But the rise in oil prices after the Russian invasion of Ukraine in early 2022 also played a big role in boosting inflation. Low oil prices have also fueled a reversal in the price of imported goods, another release valve for US inflation. Another potential source of disinflation is concern over the US financial system after the Silicon Valley bank failure. As banks cut back on lending and reduce lending, the drop in demand will put downward pressure on prices. “Even if contagion doesn’t get worse, tightening bank lending standards will have an adverse effect on the real economy,” said Paul Ashworth of Capital Economics, an economist who believes inflation will fall sharply. The fight against inflation is still in its early stages, however, and is far from over. Prices are seen falling sharply a few times before only for inflation to intensify. So stay tuned.
