Think inflation will cool down anytime soon? RSM Chief Economist Joe Brusuelas says a peak isn’t on the immediate horizon, even after the Consumer Price Index hit a 40-year high in May.
“We should not really be talking about a peak here until the price of oil and gasoline roll over,” Brusuelas told Yahoo Finance Live on Friday after the Bureau of Labor Statistics released hotter than expected CPI data.
CPI had a year-over-year increase of 8.6% last month, up from a 8.3% increase the year before, with gas accounting for a large portion of the spike. Fuel oil prices jumped 16.9% from the prior month, and gasoline prices rose 4.1% month-over-month. Typically the price of gas peaks around the Fourth of July, but Brusuelas suggested that isn't likely to happen this year.
Alluding to the war in Ukraine, Brusuelas noted, “There’s ample room for the price of oil and gasoline to move higher under geopolitical tension this summer.”
The soaring CPI has spurred speculation that the Fed will raise interest rates — which makes borrowing more expensive and ultimately tamps down inflation. The Fed recently raised rates after initially slashing them in response to the onset of the COVID-19 pandemic in 2020.
After last month’s meeting, the Fed raised short-term interest rates by .50% and targeted a range between 0.75% and 1.00%. Brusuelas expects rates will go just above 3% by the end of the year, and that they will hit 2.5% in the near term.
In terms of a more aggressive hike or a surprise hike, Brusuelas said the Fed should “begin to prepare investors and the market” in the event the Fed introduces a 75 basis point hike, an aggressive move not seen since November 1994.
If it will take some time for inflation to peak, it will take even longer for it to reach the Fed’s target rate — Brusuelas predicts CPI will take two to three years to get back 2% growth.
“I think here we have to basically balance the need to move back towards price stability,” he said, “but ensure that we don’t result in an undue increase in unemployment which is going to be a risk in the second half of next year.”
Yaseen Shah is a writer at Yahoo Finance. Follow him on Twitter @yaseennshah22