During the pandemic, we were all at home buying things online and supply chains were constrained, and goods inflation went up.
Then, when the pandemic was over, goods inflation came down, and service sector inflation went up as we started spending money on restaurants, hotels, and airline tickets.
Now the service sector is in the process of cooling down, and as a result, service sector inflation is declining. Specifically, ISM services prices paid is a leading indicator for headline inflation, core inflation, core services inflation, super core services inflation, and average hourly earnings, see charts below.
In other words, goods inflation normalized in 2022. And service sector inflation is normalizing in 2023.
Combined with rapidly falling inflation expectations, see the last chart, the bottom line is that inflation is coming down to the Fed’s 2% inflation target, and the Fed can later this year begin to move the Fed funds rate down to the r-star level around 2.5%.
In short, this inflation episode will soon be over.
Source: ISM, BLS, Haver Analytics, Apollo Chief EconomistSource: ISM, BLS, Haver Analytics, Apollo Chief EconomistSource: ISM, BLS, Haver Analytics, Apollo Chief EconomistSource: ISM, BLS, Haver Analytics, Apollo Chief EconomistSource: ISM, BLS, Haver Analytics, Apollo Chief EconomistSource: FRBNY, Haver Analytics, Apollo Chief Economist
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