Data as of March 31, 2022. Sources: WTIA, Bureau of Labor Statistics, Macrobond.
Broad-based inflation starting to slow
It was the second burst of inflation from October 2021 to January 2022 that spooked the Fed moving it quickly to its hawkish stance. Though lower in magnitude than the earlier episode, inflation at the end of 2021 was more broad-based across categories and was paired with an unemployment rate that fell from 5.9% in June 2021 to just 3.9% in December along with surging wages. That combo reeked of well-entrenched inflation, the kind that might result from too much money being dumped into a strong economy by fiscal and monetary authorities, which sloshes back and forth between higher prices and higher wages.
Core CPI advanced just 0.3% in March. That figure, while still elevated compared to norms, is encouraging. And while a single data point does not make a trend, there are many signs that price pressure is abating and several reasons to expect the deceleration to continue.
The slowing consumer
The key is the consumer. Last year’s inflation surge was brought on by unprecedented spending on physical goods, which was reflected in retail sales. Figure 3 shows that massive surge; looking past the base effects of the shutdown months you can see year-over-year growth running 15%–20% higher in 2021. As of March 2022, it dropped to 7%. Relief is setting in.
In 2021, businesses experienced surging cost pressures and strong demand. They passed on whatever cost “the market would bear,” and in 2021 consumers were willing, and able, to pay up. The fiscal authorities had the spigots wide open in 2021 with a $900 billion stimulus being doled out in the first week followed by another $1.9 trillion in March and generous unemployment benefits that ran through Labor Day. Combine those dollars with eager, vaccinated consumers and you get immense spending and price pressure.
In 2022 the situation is quite different. Many analysts cite massive hoards of consumer savings being tucked away. This is true in the aggregate, but according to our data the median household has depleted most of those savings, and lower-income households are in the red compared to pre pandemic. That will (helpfully) bring many people back to the labor market and also take some pressure off the surge in spending.
Figure 3: Total retail sales and food services (% y/y)