The change in annual inflation depends on the “new” monthly inflation rate and the monthly inflation rate 12 months ago that drops out of the calculations. While both these factors have become more important in the case of headline inflation, core inflation provides a clearer picture of the rise of inflationary pressures.
Chart 3b shows that core inflation rose sharply during three distinct episodes. The first was in the summer of 2020, as the price falls – particularly for energy – that occurred during the spring of the Covid pandemic were undone. The second episode took place in the spring of 2021 as the US economy recovered and GDP growth rose abruptly. Finally, the third episode occurred during the fall of 2021 as a combination of growth and supply chain issues led to supply-demand imbalances in goods markets.
Importantly, that episode now appears to be abating as the monthly inflation rates fell in both February and March and as the base effects have been strong, pushing down inflation. Given that the base effect will be large also in the coming months, it is possible that the peak in at least core inflation may have been reached. Much will depend on the evolution of energy, food and metals prices following the Russian invasion of Ukraine, and the extent to which they become embedded in the production costs of other goods and services.
