Many agree inflation is still on track to ease some this year and much more in 2023. But factors like rent, food prices, wages and interest rates may affect the pace.

McLEAN, Va. – Are we stuck with high inflation?

After peaking at a 40-year high of 9.1% in June, consumer price increases eased to 8.5% in July and were expected to fall significantly for the rest of the year and beyond.

But that hope was seemingly dampened in an instant Tuesday, when a government report showed that despite another sharp drop in gas, the 12-month rise in consumer prices edged down less than expected – to 8.3% in August, instead of the 8% projected. And a measure that excludes volatile food and energy items rose twice as much as projected, on a monthly basis.

Not only did food, rent and health care costs keep soaring, but the disappointing news hammered investments and 401(k) plans. The Dow Jones industrial average on Tuesday plunged 1,276 points, or nearly 4%. Investors appeared to interpret the disappointing inflation figures as a sign that skyrocketing prices are more entrenched than believed, and that the Federal Reserve would keep fighting them with big interest rate hikes that make stocks less attractive.

Is the stock market right?

“Don’t Panic,” read the headline of a Barclays report on Tuesday.

Is inflation going down in 2022?

Top economists say inflation is still on track to ease some this year, and much more in 2023. But the descent from nosebleed levels could be slower than previously thought.

Among the reasons for optimism, supply-chain bottlenecks, which are keeping goods from reaching customers and are lifting prices, are unwinding. Commodity prices have fallen. The strong dollar is making imports cheaper. And overstocked retailers are expected to heavily discount surplus goods.

“Those factors are still in play,” says Barclays economist Pooka Sriram. “We still have high confidence they will happen.”

Keep in mind that even a downshifting of inflation from 9% to 6% or 4% would still be painful for millions of households, especially low- and moderate-income Americans who are already struggling to afford basics like food and rent. And easing inflation simply means prices won’t go up as much – not that they’ll come down.

Sriram added that much of the more substantial drop in inflation expected over the next few months will likely be pushed to the end of the year and into 2023.

Where will inflation be at the end of 2022?

Since Tuesday’s report, Barclays has revised up its year-end forecast of annual inflation to 6.3% from 5.6%. Yet by the end of 2023, the firm estimates that overall inflation will tumble to a near-normal 2.6%.

Other economists say Tuesday’s report was a blip, and they haven’t changed their view that inflation is poised to pull back substantially. And soon.

“Inflation is going to decline a lot faster than people think,” says economist Troy Ludtka of research firm Natixis.

“This is a setback, not a reversal,” Ian Shepherdson, chief economist of Pantheon Macroeconomics, wrote in a research note. “We see no reason to change our medium-term inflation view.”

Here are key factors that could bring inflation down faster or keep it elevated longer.

Are rents going up?

Rent was the chief culprit in Tuesday’s report, a major expense for millions of Americans.

Rent climbed 6.7% in August from a year earlier, and housing costs are significant, making up a whopping one-third of the basket of goods and services used to gauge inflation. Without last month’s big increase in rent and other housing costs, the consumer price index – the measure that came out Tuesday – would have fallen from the month before for the first time since 2020, Ludtka notes.

The good news is that rent follows home prices, since landlords need to cover their costs. Home prices largely have peaked and have even started falling in some areas, Ludtka says. As a result, rent hikes should moderate over the next few months, and prices could even edge down by mid-2023 if home values drop sharply, as he expects.

Another positive sign: Private measures of asking rents, such as on housing website Zillow, are already showing declines, Sriram says,

The bad news: Rent lags home prices changes by about 12 months, says economist Kathy Bostjancic of Oxford Economics. And asking prices may not quickly translate to leases.

“There’s a lot of inertia with tenants,” who are often slow to move to another dwelling, Sriram says. As a result, landlords “milk high rents” as long as possible.

She expects rents to fall in the next few months, but just by tenths of a percentage point, before posting larger drops next year.

Are food prices going up?

The leap in grocery prices has moderated a bit, rising 0.7% last month, down from 1.3% in July, though costs are still up 13.5% annually. While food inflation likely has peaked, prices will probably fall slowly, with yearly food inflation still in double digits by the end of the year, Sriram says.

Why? Prices of wheat and corn have softened on fears of a global recession, but manufacturers and wholesalers bulk up on staples like bread and cereal early, so it takes time for changes to make their way to shoppers. As a result, grocery inflation may not moderate to more normal levels until the end of next year, she says.

Meanwhile, gas prices have followed oil lower, on weaker demand and recession fears. The average unleaded regular price of $3.70 a gallon is more than 20% below its mid-June peak of $5.

Sriram says pump prices will likely now stabilize. But she adds that food and energy prices are uncertain because of Russia’s war in Ukraine, a region that exports a big share of the world’s agricultural and energy commodities.

“It is a wild card,” she says.

Why are airfares and used-car prices so high?

Both airfares and used car prices declined in August, but not as much as expected. Airfares were off 4.6% and used car prices dipped 0.1%. Shepherdson and Ludtka say that simply means they have more room to slide in the months ahead.

A closely watched private index of used-car prices is already showing big declines. New-car supplies have increased from paltry pandemic levels, making buyers less likely to turn to used cars and curtailing demand, Ludtka says.

Sriram, however, says airfares could fall more slowly. While fading travel demand at the end of summer should bring down prices, sales are still relatively healthy, and prices are now close to their pre-pandemic level. Thus, they may not have much more to fall, she says.

Have wages gone up in 2022?

A big consumer shift from goods – which have been beset with supply troubles – to services was expected to soften inflation. But persistent worker shortages have kept pay hikes elevated, with average hourly earnings rising 5.2% in August, according to the Labor Department. Companies typically pass those higher labor costs to consumers through higher prices.

Bringing down pay increases “could prove tougher than expected,” economist Ryan Sweet of Moody’s Analytics wrote in a note to clients. Sixty percent of private-sector workers are in industries that have received pay increases of more than 5%, he says. And in late 2021 and early this year, more than 20% of workers were in industries with wage gains topping 10%.

That means prices at restaurants, hotels and other labor-intensive industries could keep rising. High wage growth is a big reason the price of medical care services jumped 0.8% in August and 5.6% annually, says Gregory Daco, chief economist of EY Parthenon.

What about interest rates?

Ludtka says examining specific prices for goods and services misses the more sweeping impact on inflation that he expects as demand from consumers and businesses weakens amid higher prices and rising interest rates. Already, retail sales and manufacturing orders have lost some steam.

“When inflation erodes people’s purchasing power, they spend less and firms’ ability to raise prices is reduced,” he says.

Copyright © 2022,, USA TODAY, Paul Davidson. All rights reserved.

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