Federal Reserve continued pressing , accelerating the economy even further . Additional fiscal stimulus by the federal government only added more fuel to the inflation fire . All the while , prices were getting higher and higher . Now the Federal Reserve risks being late to the game again . With signs emerging that prices are beginning to cool , the Fed needs to rebuild its credibility , and thus is reluctant to untap the brakes .
So , what are some of the signs that prices are indeed cooling ? First , we can look at the price at the pump . Prices peaked during the summer with $ 5.00 plus gasoline . This led to consumer doldrums , and consumer sentiment plummeted . Prices have now receded and are under $ 4 a gallon . Consumer confidence has rebounded . Beyond fuel , home prices have declined for the first time in a while , as well as rental costs . Lumber prices are now down to pre-pandemic levels , and scarcity is not as significant .
Other indicators of price activity also point to moderating prices . The ISM Prices Paid measure , a survey of purchasing managers across manufacturers , has been on a steady decline . Prices paid measures coming out of the
New York and Philadelphia manufacturing activity are also pointing to declines for prices paid by manufacturers in those regions . Supplier deliveries have been improving , which means that we continue to make progress with supply chain challenges that contributed to price increases . Ocean-going shipping rates have also dropped significantly since last year . The Producer Price Index ( PPI ) declined the past two months , and even the CPI declined .
There are two measures of concern , and that is core inflation , which is a measure of inflation minus food and energy costs . The core rate of inflation accelerated the past month , and that is why we have seen the adverse reaction in the equity markets . I do believe , however , that the core rate of inflation will begin to ease over the next several months , as the economy slows .
And speaking of a slowing economy , we are now likely headed toward a recession , and thus the light being shielded by encroaching darkness . Several recession indicators are now flashing recession .
One is the difference between the yield on the ten year Treasury bond and the two year Treasury . When the
latter exceeds the former a recession is around the corner . The two year is now higher than the ten year , and so we can expect a recession within 12 months , not necessarily this year .
Another indicator is the combination of the Consumer Price Index and the unemployment rate . When the CPI peaks , and the unemployment rate bottoms , these two combinations are usually followed by a recession .
As I outlined above , we are past peak inflation , and we will continue to see cooling prices . We have also passed an unemployment rate bottom . The combination of moving past peak inflation and an unemployment rate trough point to a recession .
The big question now is how long it will take the Federal Reserve to pivot from aggressive rate hikes . Trillions of wealth have been destroyed in its quest to restore credibility .
Hopefully , that credibility is not lost , and the Federal Reserve is not late to the game again .
Dr . Dufrene is the Sanders Chair in Business at Indiana University Southeast . He ’ s contributed economic analysis to several area publications .
udufrene @ ius . edu