Chart of the Week: When Will Inflation Go Away?

Chart of the Week: When Will Inflation Go Away?

Yes, inflation remains high. And like a cloying summer hit song that you can’t get out of your head, I dare say many of us are both tired of hearing about it and living with it. Since we can’t change the channel on inflation, we’re left asking: “When will high prices come back down to Earth?”

Unfortunately, we don’t have a crystal ball or soothsayer to turn to. However, we can map out potential paths inflation might take over the next nine months by taking the consumer price index (CPI) at the end of August and applying a range of monthly price increases. That’s what I’ve done for you this week by picking three possible scenarios.

At the upper end, what if prices continue to rise by 0.6% each month—the post-pandemic average? On the flip side, what if inflation returns to pre-pandemic levels and increases by 0.2% a month? What if it’s somewhere in the middle, say, 0.4% a month?

Of course, inflation is certainly not going to exactly follow any of these lines, but this analysis helps give a sense of the outcomes we may face.

Here’s how I interpret this chart:

Our base case is that inflation will moderate from the post-pandemic level. In that scenario, at year-end 2022, inflation will still be around 7%–8% but should fall to the 3%–5% range six months after that. A continuation of the post-pandemic pace of price rises is a worst-case scenario, with inflation clocking in near 9% at the end of the year and around 6%–7% in the middle of 2023.

Yes, these ranges of inflation may be wider than the overly specific two-decimal-place forecasts you often see in the media, but we believe they’re more appropriate (and useful). Getting inflation directionally right seems better than being precisely wrong.

In sum, the chart tells us that inflation is likely to remain uncomfortably high for the rest of the year, but there is potential for it to decrease meaningfully in the first half of 2023. By then, I’m hoping to have a different (and better) song stuck in my head.

Note: Chart shows year-over-year changes in the consumer price index on a monthly basis from 12/31/19 through 8/31/22 along with projected annual rates based on the monthly changes listed through 6/30/23. Sources: U.S. Bureau of Labor Services, Adviser.

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