The US inflation’s decline will be rocky

Prices are still flying high.
Prices are still flying high.
Image: Reuters/Mario Anzuoni
We may earn a commission from links on this page.

US consumer prices increased way less in April than in March, but that doesn’t mean that inflation will decline steadily. And despite the decline, inflation is still at a historic high.

Yearly inflation hit 8.3% in April, while prices increased by 0.3% from March. Most of the jump was due to rising prices for airfares, which were up nearly 19% on the month as Americans travel more regularly. Prices for goods and energy, on the other hand, cooled off somewhat.

“You can frame this print as not evidence of deceleration, but also not evidence that we’re in a further acceleration environment,” said George Pearkes, an investment analyst at Bespoke Investment Group. “It’s more like we’re in a high inflation environment around 6%.”

Many economists think that inflation peaked in March, but there are several wild cards that could make for a choppy decline, from the war in Ukraine to avian flu in the US, which is pushing up egg prices.

Gas prices declined in April

Gas prices, which reached record highs earlier this year, dropped by 6.1% in April as oil prices moved down after the initial shock of the war in Ukraine. But the price of oil has remained volatile as the conflict wears on, and gas prices are now back up—to $4.40 a gallon on May 11.

Consumers continued to pay more for new cars, food, and shelter. But even stripping out volatile categories like food and energy, prices jumped more than expected, by 0.6%. Prices for used cars and apparel, meanwhile, fell.

What’s causing inflation?

Current inflation is in large part a reflection of the lack of US investment in key areas, Alex Williams, with labor advocacy group Employ America, wrote in a blog post. For instance, the incentive to invest in semiconductors hasn’t been there since the dot com crash. In this sense, the US doesn’t need more workers, but more chip production capacity.

“To increase productive capacity requires time and substantial investment, not an increase in sectors that rely on semiconductors for intermediate goods,” Williams wrote.

The same logic applies to rents, which will continue to rise throughout the year because there aren’t enough units. According to the National Association of Renters, the US has under-built by 5.5 million to 6.8 million units in the past 20 years.

What can the government do to stop inflation?

The US Federal Reserve’s rate hikes are already increasing borrowing costs. Mortgage rates shot up to 5.27% in May from 3.2% in January, which should help curb real-estate prices. “New and existing home sales are expected to decline at low-to-mid-single-digit rates in 2022, versus our previous forecast of flat to slightly up,” Fitch Ratings said on Tuesday.

Meanwhile, the Biden administration has been taking measures to lower gasoline prices. On Tuesday, it said this summer Americans will be able to pump E15, which is usually banned during that time of year. The fuel is more polluting than regular gasoline, but cheaper. Back March, Joe Biden announced the US would release 180 million barrels of oil over the next 6 months. That’s equal to about 1% of global oil supply and 10% of US oil production.