Is US Inflation Getting Worse or Better?

The U.S. inflation is at highs not seen in 40 years. While some say there's no end in sight, others believe inflation will taper off in the second half.

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The last two years have been some of the most tumultuous the U.S. economy has experienced since the Great Depression nearly a century ago. After two years of the COVID-19 pandemic, the United States is left with record inflation. 

OPTIMISTIC PROSPECTS

James Paulsen, chief investment strategist of The Leuthold Group, a U.S. investment research firm, believes the problem is not permanent, saying, "I think that inflation will moderate here in the second half of this year. The unified message of the financial markets, from stocks to bonds to the dollar, is that inflation is transitory," he said.

Over the last four months, the U.S. labor force has grown far more than the previous year, leading to an extremely tight labor market. He added that the current situation of COVID-19 in the United States has brought "more entrants back into the labor force." 

The most critical resource is labor because that helps all other supply chain problems. "I think that's already starting to shift," Paulsen said, mentioning the "significant" tightening policies in place over the past 12 months.

GLOOM AND DOOM

Former U.S. Treasury Secretary Lawrence H. Summers believes inflation will worsen before it gets better. "I think the inflation outlook is pretty grim," Summers said, adding that "the Fed is a fair amount behind the curve."

The effect of the Ukraine conflict primarily, and the sanctions secondarily, "will be an averse supply shock manifested in higher oil prices and higher commodity prices more generally, reminiscent -- at least qualitatively -- of the 1970s, at a time when given inflation threats, we very much didn't need that," said Summers, who served in the administrations of former U.S. presidents Barack Obama and Bill Clinton.

The U.S. Federal Reserve voted in mid-March to hike interest rates to bring inflation under control and slated a half-dozen additional increases before the year-end. Some economists argue inflation could increase further and even spark a demand disruption that could lead to a recession.

The recent spike in oil prices has led to fears that high fuel prices will suppress global economic growth and cause consumer prices to surge. In Feb, the U.S. Consumer Price Index skyrocketed 7.9 percent year-over-year, driven by price hikes in energy and food. Inflation has already put a sting in the wallets of millions of Americans.

According to the U.S. Labor Department, the inflation rate for food rose for the ninth consecutive month in February, with double-digit price increases for staples including meat, milk and fruit, the biggest 12-month rise since the period ending July 1981.