- The US is past peak inflation, and the cooldown is going to be swift, JPMorgan said Tuesday.
- The bank sees inflation easing to a 3.2% year-over-year rate from 8.2% by September 2023.
- Supply-chain healing and the strong dollar will slow price growth and even bring some discounting, the team said.
Prices are still surging higher, but Americans can rest easy knowing the worst of pandemic-era inflation is already behind them, according to JPMorgan.
There are plenty of reasons to bemoan the 2022 economy, from skyrocketing borrowing costs to slowing wage growth. Yet the inflation that's plagued the US recovery since last year is set to finally ease up, JPMorgan economists Daniel Silver, Michael Hanson, and Phoebe White said in a note to clients. Headline price growth is likely to still exceed the pre-crisis average through the end of next year, but there are "signs that a moderation is already underway and that cooling will become more prominent over time," they added.
The team expects the Consumer Price Index to ease to a year-over-year pace of 3.2% by September 2023, down significantly from the 8.2% seen this September. Core inflation — which excludes volatile food and energy prices — will similarly ease to a 3.4% year-over-year pace by next year from its current 6.6% year-over-year rate.
It won't take long for relief to arrive. Inflation is forecasted to slow to 6.8% by the end of the year, marking the lowest inflation since last November.
Inflation has so far proven to be stickier than expected, with the September readings landing well above economists' forecasts. Yet as the economy charges into the new year and the Federal Reserve ramps up its war against price growth, two trends are set to put hefty downward pressure on inflation, JPMorgan's economists said.
The supply chain crisis is finally coming to an end
The shipping disruptions that lifted inflation throughout the pandemic are "finally starting to abate" and giving way to surpluses in some industries, according to the team. Americans' strong spending habits, meanwhile, are expected to fade as economic growth slows.
That convergence can quickly slam the brakes on goods inflation. A fresh influx of supply will leave firms with less leeway to lift prices, as they'll be more readily able to meet demand. Various indicators — from shipping costs to supplier delivery times — have improved "materially" in recent months, and that shift is likely to continue into 2023, the team said.
"The backlog of ships outside the ports of Los Angeles and Long Beach that peaked above 100 in January have completely cleared over the past few months," they added. "With global progress on vaccinations, we expect supply bottlenecks to normalize further."
The pivot could even bring discounts within the next few weeks. Many retailers "will turn to aggressive discounting" as inventories boom and businesses attempt to out-price their competition, Morgan Stanley said in a note published earlier in October. Many retailers — particularly toy, electronics, and appliance stores — will start cutting prices through the fourth quarter, offering households much-needed relief during the busy holiday shopping season, the bank added.
The strong dollar will drag import costs lower
The Fed's rate hikes haven't been very helpful to Americans so far. They've dramatically raised borrowing costs throughout 2022, making mortgages, car loans, and credit card debt more expensive. Yet inflation has held steady at historically high levels.
That's about to change. The Fed's actions have lifted the dollar's relative value by nearly 12% against other currencies over the past year, according to JPMorgan. That's made imported goods cheaper for US-based companies and Americans, as it lets them effectively import more at the same price as before.
Fading supply bottlenecks will make the stronger dollar even more beneficial for households, the team said. Import prices aren't just set to "slow significantly," but could even fall by the end of 2023, according to the bank. That would put a serious drag on overall inflation and show up as widespread discounting across all kinds of retailers.
The knock-on effects could keep cooling inflation well into the future. The strong dollar can lower operating costs for businesses that import most of their manufacturing components. And with the Fed poised to keep raising rates in 2023, the dollar's relative value is likely to climb even higher.