US: Inflation likely peak in March, to remain above 6% in Q4 – Wells Fargo

The annual rate of inflation climbed to 8.5% in March, the highest level since 1981. Analysts at Wells Fargo point out that despite wide-ranging price increases again in March, they believe this likely marks the peak in post-COVID inflation. They expect demand for goods to waver as spending pivots back toward services, and this transition should temper goods inflation.

Key Quotes: 

“The headline consumer price index surged 1.2% in March, the largest monthly increase since September 2005. About 70% of March's increase can be tied to higher energy prices following Russia's invasion of Ukraine, but energy was not the only source of pain for households.”

“The squeeze on households' from skyrocketing prices for necessities is very real. However, underneath the surface there are signs that pandemic-related inflation is beginning to ease. Core goods inflation fell by the most since April 2020, led by a decline in used auto prices, while core services inflation gathered steam amid higher prices for airfare, lodging away from home and other "reopening" categories. This rotation away from goods and toward services inflation has been long anticipated, and although widening lockdowns in China are a risk to this transition, today's data are an encouraging sign that goods inflation is finally rolling over.”

“Despite another month of wide-ranging price increases in March, we believe this likely marks the peak in post-COVID inflation. Upcoming monthly gains will be set against the eye-popping inflation of last spring's reopening, when prices rose 0.6%-0.9% per month from April to June.”

“Inflation remains a long way off from returning to the Fed's target. With inflation so far above target, we expect the Fed to expedite tightening and hike the fed funds rate by 50 bps at both the May and June FOMC meetings, in addition to beginning to wind-down the balance sheet in May.”