skip navigation
Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

ECONOMY
November 22, 2022

Is US Inflation Finally Rolling Over?

By Scott Beatty, CFA, Frederick R. Marki, CFA
Download the Article

Stay up to date on timely topics and market events. Subscribe to our Blog now.

While there are many measures of inflation, the Consumer Price Index (CPI) is both highly visible and the most widely used measure. Equity and fixed-income markets rallied on November 10 upon the release of the October 2022 CPI data, which showed a smaller increase than expected. Could this be a signal that inflation has peaked, and year-over-year inflation will fall even more quickly than the market expects? We believe so.

While individual components will always be volatile from month to month, we believe momentum is on the side of lower realized inflation.

Here’s a look at the breakdown of inflation components from October’s CPI report that excited the market so much.

Exhibit 1: October CPI—Underlying Components (Annualized)
October CPI—Underlying Components (Annualized)
Source: Bureau of Labor Statistics. As of 10 Nov 22. Select the image to expand the view.

The housing component includes derived and observed costs for shelter (owned homes and rents), utilities and furnishings. Note that shelter is highly correlated to home prices, but with a 12-18 month lag. While this lag smooths the data, it also misses in real time the key inflection points. We expect that the recent fall in housing prices will show up in the official CPI figures in early 2023.

For transportation, we expect that both new and used car pricing should stabilize. Chip shortages that impacted the supply of new cars are largely behind us. In addition, the 2021 run-up in used car prices has also recently receded. While these prices may not fall further, they should be more stable going forward.

Energy is a volatile sector, subject to global supply shocks (e.g., sanctions on Russia including its oil; shutdown of the Nord Stream pipeline to Europe) that impact CPI. But the futures markets currently indicate a fall in energy prices, which should reduce the energy component of CPI in the coming months.

Admittedly, inflation measures remain uncomfortably high. October’s core CPI annualized rate of 3.31%, which includes the large increase from housing, remains above the Fed’s 2% inflation target. But the data are turning, and we are optimistic that we are on a downward path.

For more details about our inflation outlook please see our new paper, Prospects for Inflation’s Decline

© Western Asset Management Company, LLC 2023. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank. Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.