Inflation begins to ease, but prices will remain high for some time


The the price of gasoline falling like a rock. Chicken wings suddenly become a bargain. And retailers, drowning in excess inventory, are looking for a deal.

After more than a year of high inflation, many consumers are finally starting to relax. Even apartment rents and car prices, two items that hit the budgets of millions of households this year, are no longer spiraling out of control.

Global supply chains are finally operating as normal as more consumers spend more on personal services like dining out and less on goods like furniture and computers that come from the ocean. The cost of shipping a standard 40ft container from China to USA West Coast is $1,935, down more than 90 percent from its September 2021 peak of $20,586, according to online freight marketplace Freightos.

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The moderation in inflation is just beginning to appear in government statistics. In October, of the Federal Reserve The preferred price gauge, the Personal Consumer Expenditure Index, posted its smallest monthly increase since September last year and is up 6 percent over the past 12 months. The better-known consumer price index rose at an annual rate of 7.7 percent, down from 9.1 percent in June.

“The worst of inflation is behind us,” said Stephen Blitz, chief U.S. economist for TS Lombard in New York. “The question is, where does inflation settle?”

The Federal Reserve has raised interest rates sharply since March in an effort to bring inflation back to its price stability target of 2 percent. Fed Chairman Jerome H. Powell on Wednesday noted signs of progress but said it was too early to claim victory. Friday stronger than expected jobs report, which showed that wages were rising too fast for politicians’ tastes, only underscored the point. The central bank does not expect to meet its inflation target until 2025.

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“Considerably more evidence will be needed to give comfort that inflation is actually falling.” By any standards, inflation remains too high,” Powell told an audience at the Brookings Institution.

Still, there are clear signs of commodity prices improving as consumers resume their pre-pandemic spending patterns. Excluding volatile food and energy prices, commodity prices rose 5.1 percent in October, down from 12.3 percent year-on-year in February.

But as commodity prices begin to cool, pressure on services is mounting. Rising demand and tight supply — think understaffed restaurants — is driving service inflation, which is running at an annual rate of 6.7 percent, more than double the figure from a year ago.

“Expectations are that commodity prices will continue to decline. But inflation in services will slow more slowly and be much softer,” said Kathy Bostiancic, chief economist at Nationwide.

Much of what is happening now with prices reflects the development of specific markets or consumers returning to pre-pandemic routines. The drop in ocean freight costs alone has reduced inflation by about 0.7 percentage points, according to Zvi Schreiber, CEO of Freightos.

By making loans more expensive, the Federal Reserve dealt a major blow to the housing industry. With mortgage rates recently topping 7%, pending home sales in October were 37% lower than a year earlier, according to the National Association of Realtors. But the full effect on the economy of higher interest rates will take many months to materialize.

Either way, users aren’t impressed. Fewer than 1 percent of respondents to a recent Census Bureau survey said they had seen prices of goods and services fall in the past two months. And 15.7% of households say they find it “very difficult” to pay their routine household expenses, a figure that is almost unchanged from the 15.9% who reported affordability problems in June.

Of course, in a $26 trillion economy, the prices of some products always fall, even as many others rise. In June, when inflation hit its highest point in more than 40 years, prices nevertheless fell this month for bacon, window coverings and men’s sweaters, according to the Bureau of Labor Statistics. So it’s important not to exaggerate the recent improvement.

that said global economic background has moved.

With Europe and the United Kingdom recession and China, hampered by its restrictive zero-covid policy, global oil demand fell. A barrel of Brent crude now costs around $85, a third less than it was in early March after Russia invaded Ukraine. As a result, the national average price for a gallon of regular gasoline is $3.47, down nearly 8 percent from a month ago, according to AAA.

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Many retailers find themselves with unusually high inventories, the result of two years of unstable supply chains. But as shipping and raw material costs have fallen, companies like Ikea have recently started to cut certain prices. Tolga Onku, manager of retail operations for Ingka Group, Ikea’s corporate parent company, told Reuters this week that he was “quite optimistic” about being able to reduce surcharges in the coming months.

The company did not respond to a request for comment.

Walmart also said last month it would look for opportunities to cut prices. Sam’s Club, the company’s warehouse membership store, recently cut the price of its in-house hot dog and soda combo to $1.38 from $1.50, undercutting rival Costco.

“High-priced living this year has had a cumulative impact on our customers, especially the most budget-conscious, and so we are focused on reducing our costs and prices as quickly as possible by item and category,” Doug McMillan, Walmart’s CEO, told investors in November.

Chickens, cars and rents provide clues as to why forecasters expect inflation to ease in the coming months, even if it takes years to return to the Fed’s 2 percent target.

Chicken prices soared near an all-time high earlier this year. Covid restrictions on poultry farms, combined with an unexpected drop in the number of successfully hatched chicks, led to a drop in supply as demand grew.

“It just created a ton of price pressure,” said Matt Busardo, market reporter for Urner Barry, a food industry information provider.

That turned around this fall, when production rebounded just in time for the typical seasonal drop in demand. The amount of chicken in cold storage has jumped nearly 20 percent since May, according to the USDA.

That created some deals — at least for the restaurants. Wholesale prices for boneless chicken breasts have dropped dramatically in the past six months, Busardo said. At Wingstop, a fast-food chain based in Dallas, executives said the price of bone-in chicken wings fell nearly 43 percent in the quarter ended Sept. 24.

“We have a favorable commodity outlook not only for bone-in wings but also for breast meat, which we believe will continue into early 2023,” Alex Kaleida, chief financial officer, told investors on Oct. 26.

The company has not lowered retail prices, but said it is offering a new chicken sandwich for $5.29 and a combo meal of 20 wings and a large order of fries for $16.99 to share the savings.

After a sharp rise in 2021, wholesale used car prices are down 15 percent from January, according to Manheim, an Atlanta-based auto auction company. And those declines are starting to show in the prices consumers pay, said Jonathan Smoke, chief economist for Cox Automotive.

New car prices will react more slowly. Dealers at the end of October had 1.56 million cars in stock, the highest figure since May 2021. That was enough to cover 49 days of sales, a significant increase from a year ago but still well below the pre-pandemic figure of 86, according to Cox.

More adequate supplies mean fewer customers pay above manufacturers’ recommended retail price, a common occurrence during the pandemic. The average new car sold in October for $46,991, which was $230 above MSRP, according to Edmund’s, a car shopping website. In May, the average buyer paid $721 above list price.

Improving new car market conditions are also drawing buyers away from the used car market, contributing to lower demand and falling prices for these lots.

“The used market is benefiting from unusual demand during the pandemic as a result of consumers being forced to buy used [who] could or would prefer to buy a new one,” Smoke said via email.

Meanwhile, apartment rents, after rising steadily throughout the year, have finally cooled. The national average rent for a two-bedroom apartment rose 8.1% from a year ago, down from 14.6% in April, according to Zumperonline rental marketplace.

The shift has been particularly dramatic in cities like Boise, Phoenix and Austin, which have benefited as employees have moved to take advantage of the work-from-home era.

“Rentals are cooling and cooling faster than anyone ever expected,” said Anthemos Georgiades, Zumper’s CEO. “’23 will be a much more affordable year for renters.”

Real-time rent data takes months to show up in government statistics, Powell said in his speech at Brookings. But it will start to contribute to lower inflation readings next year, which explains why most forecasters expect a steady decline in inflation.

The Federal Reserve expects its preferred gauge of inflation, the PCE index, to reach 2.8 percent by the end of next year, down from 6 percent today.