Commodity prices are tumbling in the latest sign that the blistering rate of inflation might be leveling off.
West Texas Intermediate crude, the U.S. oil benchmark, fell more than 8% on Tuesday and was trading at less than $100 per barrel for the first time since early May.
Meanwhile, copper has plunged below $8,000 per ton, off from the more than $10,000 it was trading at in March and April, the latest sign that inflation might be peaking.
Gas prices in the United States have now fallen for 21 days in a row after lurching upward as Russia’s invasion of Ukraine became even more entrenched. The average price of a gallon of gas is now sitting at about $4.80 — while still high, it’s more than 20 cents less than when prices peaked last month.
Lumber, a key building material, has also been falling for the past several months, while cotton has shed more than a third of its price since early May.
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A broad index of commodities maintained by Bloomberg was down as much as 4.5% on Tuesday.
Falling commodity prices are a sign of fears about the economy because they reflect expectations that fewer materials will be needed for production and transportation.
The dip in commodities is one of a string of signs that inflation may be peaking.
“Core inflation” fell for a third straight month in May, the Bureau of Economic Analysis reported Friday in its update to the personal consumption expenditure price index. Core inflation strips out the prices of food and energy, which are highly volatile, and is seen by economists as a more reliable indication of the direction of prices.
Still, many economists are being careful not to declare that inflation has peaked, especially given that some had predicted the soaring prices already peaked earlier this year and were caught off guard by May’s consumer price index numbers, which came in hotter than expected and showed inflation increased to 8.6% on an annual basis.
Thomas Smythe, a finance professor at Florida Gulf Coast University, told the Washington Examiner that he thinks it is “too early to tell” whether declining commodity prices and slowing PCE inflation mean the worst of the pain is over.
He noted that while core PCE inflation has gone down for three months in a row, the energy and food prices omitted in that gauge are two areas that have been some of the biggest drivers of inflationary pressures.
Smythe said he thinks that June’s CPI numbers will be the big test for whether inflation is now on the decline. Those numbers are set to be released next week. Smythe said still expects the CPI to be running hot at between 8% and 9%.
The Fed has been keeping a close eye on myriad forecasts and gauges, but it appeared to make the decision to hike more aggressively, by three-quarters of a percentage point, than thought last month after the 8.6% CPI numbers were released.
“While the Fed says that they make decisions based on PCE, right now they can’t avoid what the CPI number is — because that’s what’s really hurting households,” Smythe said, adding that he isn’t convinced the country is off the inflation cycle just yet.
Others see the declines in the commodity markets as solid proof that inflation is beginning to tamp down.
“Moderating commodity prices are clear evidence that inflation is cooling,” Louis Navellier, chief investment officer at Navellier & Associates, told the Wall Street Journal.
There was also a slight bit of good news in the red-hot housing market last week as home prices cooled for the first time in months, although they still remain elevated.
Prices rose 20.4% on the year in April, slightly slower growth from the month before, when prices were up 20.6%, according to the S&P CoreLogic Case-Shiller U.S. National Home Price Indices. It was the first time the index showed a deceleration since November.
Many economists say a recession is very likely this year. The National Bureau of Economic Research, a private academic group, defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” Two straight quarters of downward growth are typically seen as recessionary.
The economy contracted at a 1.6% annual rate in the first quarter, and last week, the Atlanta Fed’s “GDP Now” tracker predicted that GDP growth will decrease in a second straight quarter. Personal consumption expenditures grew by just 0.2% in May, a number that isn’t high enough to keep pace with the country’s blistering inflation.
It might be quite some time until inflation falls back down to the central bank’s preferred 2% target range. While the Fed has been more aggressive in raising rates, its target range, even after this year’s three hikes, is only at 1.5% to 1.75% — well below the rate of inflation.
Unpredictability surrounding the war in Ukraine has further muddled the ability of economists to determine when inflation might peak, especially considering the volatility of the situation and the possibility that the conflict’s scope could widen and wreak even more havoc on global supply chains.
“The timing of a peak is going to be driven by these global effects as well as how quickly the Fed raises rates in the [federal] funds market,” Smythe said.
Treasury Secretary Janet Yellen, who formerly led the central bank, also recently said that “unacceptably high” inflation will permeate the economy for at least the rest of the year, a prospect that will be difficult for families financially and bruising for Democratic lawmakers, who are assuming the brunt of the blame for the higher prices heading into the midterm elections.
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“We’ve had high inflation so far this year, and that locks in higher inflation for the rest of the year,” Yellen said. “I expect the economy to slow.”
PCE inflation is still three times higher than what the central bank is targeting, and the CPI’s headline number is more than four times higher, meaning that even if inflation has peaked, it will take some time for consumers to feel meaningful relief.
