The base effect remains the major factor pushing inflation to retrace from its may 2021 top of around 5%, a level unseen since 2008, supported mainly by headline inflation reached its bottom of 0.2% in may of last year. Since then, as inflation starts making new highs, things will become much harder to repeat the same momentum spikes that were seen in last March, April and May. the same observation is relevant across most inflation metrics including PPI, PCE prices, headline and core data, with slight differences in the month in which each indicator reached its bottom last year.

us cpi

Aside from the base effect comparative approach, many indicators show that inflation is likely to remain high for a much extended period.

the ISM manufacturing PMI prices index for May was at 88 slightly below April 89.6, but those levels remain relatively high and unseen since 2008.

In addition, supply chain disruptions across many industries causing continuous short supply in a large number of commodities, materials and industrial spare parts. nevertheless, a surge in demand as the economy reopens add up to the supply and demand gap, maintaining prices higher for longer.

Monetary inflation is another principal element to be added to the mix. with the ultra huge amounts of money printed and introduced into the system, the excess liquidity has driven the dollar purchasing power toward very low levels.

us dollar purchasing power

Digging into some of the main inflation components, we observe some declines in food and beverages ,which counts for about 15% of the CPI, versus expected continuous rise in housing that counts for 42% of the headline index.

food and beverages cpi
housing cpi

On the other hand, transportation which counts for another 15% of the inflation index weighting is expected to retrace back as restrictive measures started to unwind among various states of the country. The base effect from previous year bottom at -10.8% will play its role too in bringing the index annual percentage change downwards.

transportation cpi
  • bec = base effect comparative.

To conclude, we can see that there are multiple headwinds as well as tailwinds that will influence the inflation next move during the coming Quarter. Our base case forecast is a slight retracement in most inflation measures’ annual percentage change, but the overall levels are expected to remain historically higher at around 3% to 4% for headline inflation, and above the federal reserve average target of sustainably near 2%.