Inflation will remain stubbornly high
Higher energy prices will make it tough to bring down inflation any time soon. In fact, the inflation rate might even float higher. Here’s why.
It was the most aggressive rate-hiking cycle for decades. Central bankers, spooked by the spectre of inflation, raised rates faster and further than at any stage since the 1980s. But inflation has remained stubbornly high. In fact, in America, it’s stopped falling altogether. The annual inflation rate was 3.1% in June last year. It was 3.2% last month—no movement in 12 months. So, where will inflation go from here? Inflation will remain elevated and possibly even spike over the next six months. Then, it will start to subside. Either way, it’s unlikely to fall below 3% before the end of the year.
Four leading economic indicators drive two-thirds of the change in the inflation rate. To demonstrate this, 𝑉𝑎𝑙𝑢𝑎𝑏𝑙 used regression, a fancy word for drawing a line-of-best-fit, on the last 30 years of inflation data and dozens of economic variables. After removing the ones with the least predictive power, just four remained: energy prices, housing vacancy rates, wage growth, and corn pr…