Inflation: Has It Peaked?

 The Federal Reserve is conducting an aggressive war on inflation, with a risk that its policies will trigger a recession, as it did in 1980. The basic strategy is to get “you” to spend less, which will reduce the pressure on prices (so would producing more stuff but that’s not in the Feds toolbox). With (real) sales weakening and unemployment likely to rise soon, firms will stop raising prices and may actually reduce prices depending on how severely the economy responds, bringing a halt to the inflation.

So, what are the tens of millions of small firms who sell us our GDP doing with prices? Raising them! In May of 2020, 12% of a sample of NFIB member firms (approx. 300,000) reported raising their selling prices. In May of 2022, 71% reported raising selling prices, matching the 49-year record high reached in July 1974. That is inflation.

A recession will certainly put an end to inflation, as it did in 2008 when the net percent of firms raising prices (seasonally adjusted) fell from a net 30% to a net -25% (more firms cut prices than raised them) in April 2009. More firms cut prices than raised them from January 2009 to January 2011, 26 months.

Actual Price Increases. Small Business Economic Trends survey. 

NFIB

One of the main drivers of input costs and, therefore, output prices, is compensation. As Chart 2 suggests, labor costs started pushing output prices up in January 2020, rising from 21% in December 2019 to 25%. In December 2019, only 21% reported higher prices. But, in January 2020, reports of higher prices rose to 29% after reports of higher compensation in December 2019. Reports of higher compensation subsequently rose to 50% in January 2022, and remains high at 44% in October 2022. January appears to be the peak, with the percent raising compensation turning down. And, the percent of firms raising selling prices followed a few quarters later. So, this may indeed signal the peak for raising compensation and a peak in the net percent raising selling prices (inflation).

Changes in Prices and Labor Compensation. Small Business Economic Trends survey.

NFIB

However, that’s not an end to inflation, just a slowing in the pace of price increases. It could happen quickly as in 2009 (Chart 2), when the PCE inflation rate fell to -2.7% in the first quarter. With price indices currently about 8% higher than a year ago, prices will have to fall dramatically to restore the wealth and purchasing power lost to inflation.

William Dunkelberg is Chief Economist for the National Federation of Independent Business, where he focuses on entrepreneurship, small business, consumer behavior and the economy. He is also Professor Emeritus at Temple University.

https://www.forbes.com/sites/williamdunkelberg/2022/11/29/inflation-has-it-peaked/