After hitting another 40-year high, U.S. CPI inflation is likely near the peak, with stabilizing commodity prices and slower demand for durable goods. Nonetheless, the Fed will need to engineer a slowdown to bring prices to target—creating a challenged environment for markets going forward.

Price movement driving CPI inflation
Month-over-month, January 2000 – present

Line graph showing price movement driving CPI inflation month over month from January 2000 to April 2022

Source: Bloomberg, Bureau of Labor Statistics, Principal Global Investors. Data as of April 12, 2022.

Skyrocketing food and energy prices pushed United States CPI inflation to 8.5% y/y in March, another 40-year high. Barring any additional geopolitical or COVID-19 supply shocks, there are tentative signs that inflation may be near its peak. Though it may take many quarters for prices to normalize to the U.S. Federal Reserve’s (Fed) inflation target.

While price pressures in services and non-durable goods were elevated, March saw deflation in durable goods, driven by a fall in used car prices, which suggests softer demand is outweighing limited supply. Additionally, higher commodity prices stemming from the war in Ukraine passed through, as expected, to U.S. consumer prices. However, WTI oil has moderated to $100/barrel in April, down from the peak of $130/barrel in March, which suggests energy may exert less upward pressure to headline CPI inflation in the coming months.

Despite these signals that inflation could be nearing its peak, CPI may still be above 5% by the end of 2022, as geopolitical conflicts and Asia lockdowns may prevent the full healing of supply chains. Therefore, aggressive Fed action is needed. Though equities are expected to have positive return this year, as the Fed tightens financial conditions to slow growth, active management will remain paramount for selecting companies that can maintain pricing power in a challenged environment.

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