Kiplinger's Inflation Outlook: Rising Prices To Ease Soon

Inflation will drop in the next few months, but price pressures remain in the services sector.

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There were signs of improvement in the April consumer price index (CPI) report

The inflation rate edged down to a still-high 4.9% in April and should drop to around 3.5% in the next few months. Much of the decline will happen because big price increases a year ago will no longer be in the calculation, but some of the slowdown in inflation will be because of easing price pressures showing up now. Shelter prices, the biggest single component in the index, slowed their rate of increase in April to 0.4%, from 0.8% in March, and are expected to slow further over the coming months. The prices of other services slowed significantly, to 0.1%. This is the so-called “core services” component that the Federal Reserve is focused on.

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Grocery prices are starting to reverse their previous spike, declining modestly in April for the second month. Meat prices edged down, and egg prices have fallen about 19% over the past three months. Price increases at restaurants eased for the first time this year, indicating that consumer resistance to rising menu prices may be mounting. Though gasoline prices rose, other energy prices declined, and energy prices in general seem to be on a meandering trend. 

April inflation would have been lower if not for a surprise jump in used car and truck prices. However, this trend is already beginning to turn around. New vehicle prices edged down in April, the first decrease in two years.

Signs of inflation moderating should enable the Federal Reserve to pause its campaign of hiking short-term interest rates at its next policy meeting on June 14. Concerns about depositor confidence in certain regional banks will be the main reason for the pause, but the April inflation report will make the decision easier. 

Yet, the Fed will remain concerned about persistent inflation in the services sector, which will likely keep it from cutting rates this year, unless a recession hits. The Fed would like to see wage increases start to soften in order to prevent a cycle of further price increases, with businesses trying to maintain their profit margins by passing higher wage costs along to customers.

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David Payne
Staff Economist, The Kiplinger Letter

David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.