Peak Inflation?

It certainly looks like inflation has peaked. Since the June consumer price index was reported at being up 9.1% year over year, many costs have come down. Energy prices are lower; lumber, steel, copper, many of the grains and various others have recently retreated too. These should feed into future inflation calculations. There are a few components that will be sticky and not come down easily. Rent, housing costs, and labor are among the most important. However, with a slowing economy, it is unlikely that these will continue to make gains.

The Federal Reserve will certainly continue to raise interest rates. This next increase has 0.75% baked in. That will put the fed funds rate at about 2.25%. Look for 3 – 3.5% as an ultimate target. This has been considered in the range of a neutral rate for some time. Neutral is the rate considered to not restrict the economy, but also not be accommodating either. Having interest rates that reward savings and encourage careful use of credit is way overdue.

If inflation has indeed peaked, then the Fed should not have to raise rates beyond neutral. Remember, the economy is also slowing. There is no need to go overboard in tightening when economic forces are already working to lower price increases. The stock and bond markets are already sniffing out that inflationary trends have turned down. It just may take a little more time for this to be evident. Stay steady my friends.

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