While energy continues to drive goods prices higher, “I think we are at the cusp of other goods flattening out,” said Stephen Gallagher, U.S. chief economist at Societe Generale SA. “The problem is that as it comes off, it’s not enough to bring down the headline inflation numbers to a pace that is acceptable or anywhere close to the Fed target -- not with rents, not with the service side at 4% plus and appearing to accelerate.”
More broadly, prices for services are likely to show some volatility in the coming months as companies adjust to new levels of demand. Airlines, for example, will eventually get more competitive, and travelers will only pay so much for fares, said Omair Sharif, founder of Inflation Insights LLC. That will force prices to eventually come down, he said.
Meantime, labor costs, which have been rising as employers boost pay to attract workers, may eventually start to put downward pressure on overall inflation. The rate of employment growth in some sectors like leisure and hospitality, which were the “epicenter of reopening,” is now slowing, so wage gains in those industries is decelerating as well, Ryan said.
Even though economists are growing more optimistic that overall inflation will cool in the coming months, events unfolding outside of the U.S. pose major risks to their forecasts.
The Russia-Ukraine war, combined with new Covid-19 lockdowns in China, could worsen the inflation picture in the near term -- especially if energy prices spike again, food costs accelerate or supply-chain constraints worsen.
“Right now we’ve seen both food and energy prices increasing a lot, which could feed through to even more food inflation in the second half of the year,” T. Rowe’s Uruci said. “That, and the potential supply-chain constraints, can exacerbate inflation pressures, just as we get more progress toward lower inflation.”
This article was provided by Bloomberg News.