Inflation continues to dominate the economic news for many reasons, and the most important is the role that prices play in how, when, and where goods and services are produced, transported, and sold.
At Mackay and Co., we noted that both consumer and producer goods prices were adversely affected by the disruption of their supply chains during the pandemic that closed the global economy and the reopening that followed.
One of the results of these disruptions was to provoke a change in the stance of the Federal Open Market Committee (FOMC), the policy-setting entity of the Federal Reserve Board, toward raising interest rates in an effort to quell some of the inflationary forces at work.
In this piece, we will briefly review what has happened to several important measures of inflation, discuss their prospects going forward, and then take a look at what signals we can look for to see when and how FOMC will undertake its next policy shift. Spoiler alert: They can’t raise interest rates forever.
Based on what we know now, it appears the rate of inflation, as measured by the seasonally adjusted year-over-year percent change in the All Items Consumer Price Index (CPI), peaked at 9.0% in June 2022. While this is the most widely followed measure of inflation, it is not the only one. And FOMC looks at several other measures as it considers what to do about inflation.
The somewhat slow descent of the CPI from its peak (it was still at 8.2% in September) has to do both with how the index is compiled as well as the performance of the prices involved in that compilation. The CPI is a weighted index, meaning that some components receive more emphasis than others. The largest components of the CPI are those involved with the consumption of shelter. Their combined weights are almost 30% of the index, and those prices are still rising faster than they were a year ago. Moreover, they are expected to continue at or above their current pace for at least another six months.
On the other end of the weighting scale are items like gasoline and airline fares. Together, those series account for about 4% of the index. But those prices are rising at extremely high rates (42.9% for airline fares, 18.2% for gasoline), so their weighted contributions are substantial. Here, again, we expect their pace of increase to be sustained well into 2023.
Another set of prices we previously mentioned were those of truck transportation services. Here, we have seen a bit of easing from the peak composite rate of 24.9% set in May to 16.3% as of September. Most of that easing has happened in the long-distance segment of the market. In September, local freight rates were up 19.2% from their year-prior level; little has changed from the peak rate of 21.2% they set in April. Recent news in the trade press suggests there could be some further easing in freight rates, but significant and lasting declines will only come as freight volumes slacken.
This brings us to FOMC and the path of interest rates. One of the surest ways to slacken freight volumes is to have a recession, and there are many who think that the rate increases that have already taken place could be enough to bring about such an event.
FOMC never wants to start a recession, but it cannot be indecisive in its fight against inflation. Over the next several months, we expect FOMC to declare victory and stop raising rates. That declaration is likely to come after a three-stage process.
In the first stage, you can expect to see the president of one of the regional Federal Reserve Banks (there are 12) making speeches about how it might be time for FOMC to change course.
In the second stage, you can expect to see a member of the Board of Governors of the Federal Reserve (there are seven) start to make speeches along the same lines. It is also possible that there will be dissents in the vote taken at the end of each FOMC meeting on the policy action that is announced. So far, all of the votes to raise rates have been unanimous.
The third and final stage will be when Fed Chair Jerome Powell speaks on the subject either in the “forward guidance” section of the press conference that follows FOMC meetings or in Congressional testimony associated with the several appearances he has to make on Capitol Hill every year.
Keeping on eye on these signals will better prepare the transportation industry for the road ahead.
