Has Inflation Finally Peaked?

The consumer price index report comes out Friday, and may provide a degree of clarity about the current path of inflation. One hopeful hint was found in the recent personal income and outlays report issued by the Commerce Department at the end of May.

The report showed the Fed's preferred measure of inflation, the core personal consumption expenditures (PCE) price index (excluding volatile food and energy prices), rising 4.9% in April, which is less than the 5.2% increase in March. Headline PCE that includes food and energy prices increased 6.3% in April, which while high is still less than March's 6.6% rise. The recent jobs market report was also strong, while wage pressure came in slightly lower than expected, suggesting greater room for the Fed to raise rates without provoking a recession.

However, even if Friday's report provides further confirmation that inflation may have peaked, we are still a very long way from normal. The Cleveland Federal Reserve President, Loretta Mester, commented that she needed to see months of improved inflation data before feeling comfortable with inflation trends.

The Fed remains likely to raise rates by 50bp at each of its next two meetings in June and July. If inflation data improves over the summer, then the Fed could consider smaller rate hikes of 25bp at later meetings, or perhaps even a pause if the data is unexpectedly good. Given the market's struggles this year, the prospect of normalizing inflation while limiting damage to the overall economy is a tantalizing dream that, if incoming inflation data is promising, could bring a measure of relief to sagging equities.

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