U.S. inflation is near its highest level in 40 years, creating challenges for households, businesses and government policymakers. Is the unusual wave of price increases nearing a peak? If so, how soon will inflation slow? Most importantly, where will inflation stabilize in the long run?

Economists give several signals to expect U.S. inflation:

1. Short-term inflation momentum

The most closely watched inflation data is the year-over-year increase in the consumer price index (CPI), which measures how quickly prices have risen in a month compared to a year earlier. Lou Crandall, chief economist at Wrightson ICAP, said that while the indicator helps measure longer-term inflation trends, it may be overly focused on past inflation levels. He and other economists have plotted the changes in the CPI from three months ago and from a year earlier, the former being more indicative of recent inflation trends.

2. Potential inflation

These short-term factors of rising oil or food prices do not reflect overall price pressures in the economy. But economists have worked out data that can identify inflation across the economy. Alex Lin, senior U.S. economist at Bank of America Global Research, recommends focusing on the Cleveland Fed’s 16% trimmed-mean CPI, an inflation measure that strips out the most extreme price changes, leaving the bulk of the price in the middle Changes, these data can better explain how inflation is formed.

3. Commodity carnival is over

The early days of the pandemic saw a surge in demand for manufactured goods, while demand for services plummeted. At the same time, due to the supply chain disruption related to the epidemic, the imbalance between supply and demand has resulted in severe shortages of commodities and rising prices. When consumers return to normal consumption of goods and services, this may reduce the pressure on product prices. One way to gauge whether this is happening is to track changes in the balance of two major categories of spending in the Commerce Department’s monthly Personal Consumption Expenses report.

4. An overheated labor market

Focusing on wage growth will be important as consumers shift back to spending in services, which tend to be more labour-dependent than commodity production, Lin said. He stated:

If you plot the trend over time, you will see that wages and service sector inflation go hand in hand.

He recommends keeping a close eye on the Atlanta Fed’s salary tracking system, which also allows users to filter data by salary level, demographic group and other factors. A useful comparison is the number of job-hoppers versus the number of workers who stayed put.

5. Rental cost

Rapid wage growth increases American incomes and drives up the price of everything—especially housing costs. Housing prices are key to understanding where inflation is headed, as housing costs make up nearly a third of the CPI. Aichi Amemiya, U.S. economist at Nomura Securities, recommends looking at Zillow’s rent index and Apartment List’s rent estimates to better understand housing cost trends.

6. The automotive market is key

Over the past year, prices in the auto market have accounted for a large percentage of overall inflation, Amemiya said. Autos and parts contributed 1.3 percentage points to the 8.3 percent CPI increase in April. Among them, used cars are the biggest factor. For inflation to drop significantly, used car prices have to drop. Amemiya recommends looking at Manheim’s used-car value index, which tends to lead the CPI series by a month or two.

7. Parts vulnerable to the epidemic

The travel industry, in particular, is particularly vulnerable to the pandemic – especially airfare, hotels and car rentals. One way to gauge consumer attitudes toward the pandemic is the number of travelers passing through airport checkpoints, as published by the U.S. Transportation Security Administration, Amemiya said. Data is updated daily and is close to real-time metrics.

8. Oil futures

Soaring energy prices have been the main cause of inflation over the past year, while oil prices have hit record highs this year. Looking at the prices of U.S. crude oil futures contracts can give a rough idea of ​​where oil prices are likely to be in a few months or a year. In the short term, the U.S. Energy Information Administration (EIA) updates retail gasoline prices on a weekly basis. The American Automobile Association (AAA) provides daily state and national gasoline prices.

9. Inflation expectations

Once people start noticing inflation, it will inflate itself. That’s why so-called inflation expectations are cause for concern, says Alex Lin. The median inflation expectations for the next 5 to 10 years from the University of Michigan’s monthly consumer survey is a good indicator of inflation expectations. He said:

We’ve seen some sort of rebound — they appear to be in line with the 2% inflation rate the Fed is trying to set, but if they continue to climb, there will be more panic.

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