Stop Worrying – Inflation Peaked in 2022

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This article was authored by: Austin Rogers

We have been arguing for a few years now that the post-pandemic inflationary surge was a unique, one-time shock caused by the combination of massive money creation and supply chain breakdowns. Those two factors resulted in a generational high in inflation, which was hit in 2022. Growth in the money supply briefly declined in 2023 and has since returned to a very modest level. Meanwhile, global supply chains have been restored, easing the bottlenecks that pressured prices higher. That is why we have consistently contended that the present environment is not similar to the experience of the 1970s, which saw multiple successive waves of inflation, each of which was preceded by spikes in the money supply and accompanied by various supply shocks. Rather than waves crashing ashore, the more accurate illustration of what has occurred in the last several years is a mountain peak. The only reason the CPI still shows a year-over-year number over 2% is the way the index calculates shelter/housing inflation. It basically uses average rent rates paid rather than the real-time market rent rate. Substituting shelter CPI for real-time housing inflation data (collected and averaged from multiple private sector sources), we find that real-time inflation has been at or below 2% for two straight years now. What about tariffs? Aren’t tariffs going to put upward pressure on consumer prices? There is some evidence that economic growth is weakening such that consumers may not have the willingness or ability to shoulder meaningful price increases. Remember: unlike 2021-2022, consumers today are not flush with cash from Uncle Sam. Job and wage growth have cooled down considerably. Credit card balances have surged, while consumer delinquency rates have swelled to uncomfortably high levels. Higher priced tariffed goods may simply take wallet share from other, non-tariffed goods and services. For example, in response to paying more for tariffed goods, consumers may cut back on certain other areas of spending, like travel, eating out at restaurants, and other little luxuries. In the May CPI report, for example, airline fare prices fell 7.3% YoY after falling 7.8% YoY in April. This appears to be in response to air travel traffic through US airports falling year-over-year. Outside of the COVID-19 pandemic, U.S. airline fares have not been this low since 2006, according to the CPI. We think it is possible that consumers will continue to pull back on discretionary spending over the course of this year as tariffs gradually get priced in. This may mean that certain categories of the CPI see deflation while others see inflation, resulting in a muted effect on the headline and core metrics.