An Update on Inflation’s Silver Linings

This morning, the Bureau of Labor Statistics (BLS) released the Consumer Price Index (CPI) for March 2022. This is the most commonly used inflation gauge in the United States, and the investment markets were anxiously awaiting this particular report. The question wasn’t whether it was going to be bad. It was just how bad would it be?

In no uncertain terms, the headline number was catastrophic. The CPI was up 1.2% during March alone, and has increased an eye-watering 8.5% over the last 12 months. The latter is the highest level since December 1981. Given the fact the median age in the US is currently around 38.1 years, comfortably more than half the population wasn’t even alive the last time the CPI was this high.

Obviously, this hurts pocketbooks and monthly budgets. After all, regular unleaded gasoline was up 19.3% in March alone, and has climbed 48.8% over the last year. Prices at the grocery store aren’t any better, as beef has climbed 16.0% over the last 12 months, chicken has soared 13.4%, pork is up a whopping 15.3%, and even butter has gone up 12.5%.

Truly, unless you don’t eat and don’t leave the house, you have felt inflation’s sting. The question remaining is: just how much longer is this going to last? The answer requires pulling out a magnifying glass to find silver linings in the CPI’s dark clouds.

As bad as this morning’s headlines were, and they were bad, there were a few bright spots in the report. Namely, prices for all items ex food & energy were up a far more reasonable 0.3%. This works out to a 3.7% annualized rate when you compound it on a monthly basis. While higher than anyone one would like, this number suggests prices are starting to moderate everywhere else but the grocery and the gas station.

Small favors, huh? I mean, even IF prices are starting to level off outside of food & energy, the latter is crushing household budgets. You simply can’t ignore those things, right? To be sure. This is when you have to start viewing the glass as half-full, as opposed to half-empty.

Given what has happened in the commodities’ market over the last several weeks, while it might be a little premature, it seems the worst might be behind us when it comes to prices at the pump. This doesn’t mean they are poised to fall sharply anytime soon. It simply means ‘we’ likely won’t have another 19.3% month in April like we had in March.

The same can largely be said of the grocery store. With the exception of wheat, which is under pressure from the continued morass in Ukraine, agricultural commodity prices have also started to behave a little more normally. As is the case with gasoline, this doesn’t mean the bill at the check-out line is going to decrease sharply. It isn’t. However, April’s increase probably won’t be as bad as March’s 1.5% observation.

In other words, as the monthly observations start to level off slightly, so will the 12-month number. It might take a couple of months for the ‘year over year’ number to finally peak and start falling, but it will. By the time the dust settles and the smoke clears, the CPI will continue to increase at a decreasing level.

While that might not give consumers the break they need here and now, it is a start, a move in the right direction. Although they are faint, there are lights at the end of the tunnel, at least as they pertain to the CPI, and, no, it isn’t a train. There are two important reasons for this.

First, consumer spending has been cooling recently for a number of reasons, which will make another newsletter but not this one. Second, the Federal Reserve is on course, path, whatever you want to call it, to make money more expensive in the US economy. This has traditionally driven down consumer prices, and there is no reason to think it won’t this go around.

So, in conclusion, this morning, the BLS released the CPI for March, and it was pretty ugly. However, it could have been worse, believe it or not. Further, unlike some previous months, there were some silver linings in inflation’s dark clouds.


Take care, and thank you for your continued support.

John Norris
Chief Economist


Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.