Recent research from the Saint Louis Fed suggests that while energy prices are too volatile to accurately predict inflation, food prices can provide some insights. So far in 2023, food has been the most effective indicator for predicting inflation, with healthcare also growing in significance.
Are we nearing the 2% goal?
There are reasons to be cautiously optimistic. After reaching a peak of 11.4% in August 2022, the year-on-year increase in U.S. consumer food prices was 7.7% in April 2023. Although most retail food prices are still higher than they were a year ago, the overall trend appears to be moving in a consumer-friendly direction.
What’s causing the delay?
Firstly, it takes time for lower commodity prices to be reflected in retail food prices. Secondly, while energy costs have decreased from their peak and some supply chain issues have been resolved, wages and other costs continue to rise.
Where does this leave the Fed?
The Fed finds itself in a tricky situation. Persistent economic strength and slow progress on bringing down inflation combine to make a compelling case for additional rate hikes. However, further tightening of monetary policy could pose challenges for regional banks and potentially trigger larger shocks for bigger players. It could also negatively impact other sectors of the economy.
All in all, despite their recent calm and cautious recovery, the markets are still liable to disappoint those who take all of the above as a cause for unguarded optimism.