Inflation: An Inside Look at Variables That Could Have an Impact

2022 has been hard to navigate as both stocks and bonds have suffered material weakness due in large part to inflation increases and resulting Federal Reserve (Fed) policy. 

In this latest edition of LPL Street View, Director of LPL Research Marc Zabicki takes an inside look at some variables that could impact inflation in the months ahead.   While consumer price inflation has only receded modestly so far, other manufacturing and services price levels have improved fairly dramatically.

There are many variables that go into determining domestic price levels in the United States. To get a sense of how that may translate into prices at your retail store, grocery store, and shopping mall, we often have to look up the chain of production.  That look can inform what prices may eventually be paid by end-buyers when goods or services are consumed.

When looking at recent data for import prices, producer prices, and indices of prices paid by manufacturing and services companies, it’s apparent that pricing up the chain of production is receding, meaning input cost inflation is dissipating.  This pricing trajectory has already had some influence on consumer prices as CPI numbers have come down from a peak reading in June. 

Will the relatively steep deceleration in these price series eventually translate into a more definitive drop in consumer prices?  Time will tell, but we believe that will generally be the case, although the housing cost component of CPI could remain sticky for some time.

Think about how we got here for a moment. We abruptly shut down global economies due to COVID-19 and then turned them back on.  That historic action no doubt helped fuel the economic imbalances that are contributing to unusual levels of inflation.  While inflation has been more pronounced and has lasted longer than we anticipated, we are getting definitive signals that indicate that inflation will continue to decelerate.

While we are still expecting a bumpy ride in capital markets, we anticipate that inflation deceleration will slow and eventually stop the Federal Reserve’s tightening cycle and improve visibility for both equity and bond investors.

You may also be interested in:

• Irrational Behavior and Sentiment: Could the Markets be Wrong about Inflation? – September 29, 2022
• Are Markets Pricing in a Recession? – September 15, 2022
• The Two Issues That Could Offset a Major Recession – August 31, 2022