The fastest increase in U.S. inflation in 40 years seems to have peaked for now, but uncertainty over global prices for energy and other commodities will likely keep inflation elevated indefinitely at levels not seen in decades.
On June 10, the U.S. Bureau of Labor Statistics will release May data for its consumer price index, the market's preferred measure of inflation. Economists forecast the index climbed 8.2% from May 2021 to May 2022, according to Econoday. That would be down from 8.3% year-over-year growth in April and 8.5% growth in March, which was the fastest rate of growth since 1981.
Core CPI, which excludes more volatile energy and food prices, is expected to have reached 5.9% in May, down from 6.2% in April.
"We probably have peaked," said Michael Pugliese, an economist at Wells Fargo Securities.
Inflation expectations appear to reflect that view, with the bond market viewing the surge in inflation as relatively temporary.
'A long way from 2%'
On June 7, the five-year breakeven inflation rate, a rough measure of the bond market's view of inflation over the next five years, closed at 3.03%, down 56 basis points from its recent high on March 25. The 10-year breakeven inflation rate settled at 2.73% on June 7, down 29 basis points from its April 21 high.
In March, the University of Michigan's inflation expectations for the next 12 months reached 5.4%, its highest level since 1981. Those expectations remained at 5.4% in April, according to the university's latest survey.
While inflation may have peaked, its current level remains well above the pre-pandemic pace of growth and the Federal Reserve's target of 2%. And without relief in climbing commodity prices, particularly oil, gas and food, inflation will remain near historic highs.
"You'll see inflation slowing, but you're talking about slowing from a really rapid pace of growth," Pugliese said.
Pugliese said he forecasts inflation to be about 7% by the fourth quarter of this year.
"That's still a long way from 2%," Pugliese said.
Comfort zone
U.S. inflation may not reach pre-pandemic levels until 2024 at the earliest, said Matt Peron, director of research at Janus Henderson Investors.
"We do think we can get into the 'comfort zone' sometime in 2023, which is to say lower inflation and a clear path towards, say, 2.5%," Peron said. "Much depends on the geopolitical backdrop, supply chain, as well as the level of demand."
Supply chain problems are expected to ease and some items that have seen the most substantial increases, such as used cars and airfares, are expected to cool this summer.
But other items, particularly energy prices, face far more uncertainty, as the war in Ukraine wages on and supply remains well below demand.
"Core inflation, which excludes energy and food, may eventually calm down as demand patterns get back to normal and retailers start putting their excess inventory on sale, but headline inflation, which is what everyone watches, is likely to remain elevated," said Marshall Gittler, head of investment research at BDSwiss.
Gittler said while the deepest impacts of the pandemic are fading, the war in Ukraine shows no sign of ending. Energy and food prices are unlikely to see much decline as long as sanctions remain in place.
"And even after the sanctions have ended and trade gets back to normal, supply will take some time to recover," Gittler said. "You can't just turn off an oil well and turn it back on at will."