Consumer Inflation High but Trending Lower

Several Federal Reserve officials have made comments recently suggesting that rate hikes will continue well beyond the 25-basis point increase expected later this month, with the theme being high inflation. There are several data points that gauge US inflation, with the most well-known being the producer price index (PPI), which measures inflation at the wholesale level, and the consumer price index (CPI), which measures inflation at the retail level.

US Consumer Price Index

Source: US BLS

While the PPI is seen as a leading indicator, the CPI tends to have a bigger impact on market sentiment. As higher prices reach the retail level, consumers are forced to spend more money on regular purchases, and they tend to hold off on buying discretionary items. This demand contraction tends to become broad-based, and it has a wide-reaching impact on the commodities that are negatively impacted by lower demand at the wholesale and retail levels.

g7 + Euro Zone + China

Source: Reuters

From June 2012 until March 2021, the US CPI stayed below the 3% year-over-year rate, and inflation became an afterthought for many consumers. As the US and global economies emerged from COVID, there was an upsurge in inflation for many developed economies. This continued for more than a year, with the June 2022 US CPI showing a 9.1% year-over-year increase, the highest since November 1981. Consumer inflation reached even higher levels in Europe, with CPI readings for the EU, Germany, UK, and Italy posting double-digit year-over-year rates.

Since mid-2022, there has been a pullback in consumer inflation. In the January reading, US CPI came in 2.7% below its June 2022 peak and marked the seventh month in a row with a decline in the year-over-year rate. The EU, Germany, and Italy are more than 2% below their peak readings.

While a 6.4% year-over-year rate is still high for US CPI, there has been a trend towards lower consumer inflation. If this continues over the next few months, it could encourage the Fed to hold off on additional rate hikes. Commodities such as cocoa, coffee, cattle, hogs, cotton and RBOB gasoline would benefit from stronger consumer demand, and a trend of declining inflation could be a benefit to commodity and markets across-the-board.

Originally Posted March 8, 2023

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