Is inflation set to slow quickly? Let’s read the tea leaves.

And consumers also expect inflation to ease, the survey shows.

Prices are still rising too fast, of course, to ease the heavy financial burden on Americans or pacify the Federal Reserve, the agency tasked with keeping inflation under control.

The Fed is raising interest rates to reduce inflation, which is adding to the suffering of consumers. The central bank is expected to raise rates again next week.

“Inflation remains somewhat stable, and that’s why we believe the Fed has tightened further,” said Raymond James economist Giampiero Fuentes.

To wit: The cost of living as measured by the Consumer Price Index has risen by a sharp 6% in the past year.

While the inflation rate is down from a 40-year peak of 9.1% last summer, prices are still rising more than three times as fast as they were in the decade before the pandemic.

The Fed aims to bring inflation back down to its target of 2% per year, but even the central bank thinks it may take a few years to reach this target.

Can inflation fall even faster than this? a very small but growing number of Wall Street DJIAs,
-1.19%

spx,
-1.10%
Economists think it is possible.

They point to easing global supply-chain disruptions, which contributed heavily to the worst inflation outbreak in decades in 2021. As supply moves more freely, price increases have slowed.

High interest rates are also doing their part to slow down the economy, he points out, especially in price sensitive sectors like housing. Home sales and construction have declined due to high mortgage rates.

The sudden closure of California’s Silicon Valley Bank, for its part, may have triggered a credit crunch, in which US financial institutions cut lending to protect their own interests. Reduced credit typically slows demand and eases upward pressure on prices.

The signs of slowing inflation are most evident in US wholesale prices. As the accompanying chart shows, changes in wholesale costs tend to foreshadow changes in consumer inflation.

The producer price index peaked last summer at an annualized rate of 11.7% and has slowed sharply since then. Wholesale costs fell for the second time in three months in February, bringing annual growth down to 4.6%.

The last time WPI inflation was this low was about two years ago.

“The fall in producer prices in February will impact consumer prices over time and help moderate consumer inflation in the coming months,” said Scott Anderson, chief economist at Bank of the West.

Even better, partly finished goods and raw material costs are showing even greater progress. These costs determine consumer prices in large part.

Partly finished goods prices have fallen in seven of the last eight months and they have risen only 2.1% in the past year. These prices peaked at an annual rate of 26.6% about a year and a half ago.

Raw material costs have also declined sharply since last fall. Prices have dropped by 11% in the last year.

Granted, the reversal of higher oil prices from last summer has helped a lot in moderating inflation. But a spike in oil prices following the Russian invasion of Ukraine in early 2022 also played a big role in boosting inflation.

Low oil prices have also pushed up the cost of imported goods, another release valve for US inflation.

Another potential source of deflation is concern over the US financial system after the Silicon Valley bank failure. As banks close the hatch and reduce lending, the fall in demand will also put pressure on prices.

“Even if the contagion doesn’t get worse, it will have a disproportionate impact on the real economy,” said Paul Ashworth of Capital Economics, which calls for a sharp decline in inflation. is defined.

However, the fight against inflation is still in its early stages, and is not over yet. Due to the high inflation, a sharp decline in prices has been observed some time ago. so stay tuned.