Inflation Hit a 30-Year High in October, But Has it Peaked?

November 11, 2021

Prices rose at the fastest pace in more than three decades in October, but one leading economic indicator is signalling that last month may have been the peak.

The consumer-price index (CPI), which tracks what consumers pay for a standard bundle of goods and services—increased in October by 6.2% from a year earlier, according to the Labor Department. This was the fastest year-over-year increase since 1990 and marks the fifth straight month where inflation has topped 5%.

Price increases were broad, with consumers paying more for everything from cars and gasoline to rent and furniture. Food prices, both in grocery stores and at restaurants, saw the biggest increase in decades.

The primary driver of the recent inflationary pressures is a mismatch between supply and demand. Consumers, flush with cash after government stimulus and increased pandemic-era savings, are eager to spend. Meanwhile, producers have been stymied by supply-chain disruptions, labor shortages, and shipping bottlenecks, driving up costs that are passed on to their customers.

Luckily, it appears that at least one of the causes of inflation may be subsiding. 

The Baltic Dry Index (BDI), which tracks global shipping rates, is seen by many economists as a key leading indicator for inflation.

The BDI began to surge in January, jumping to 2,000 from 1,350 in December. A few months later, the CPI climbed to 2.6%, its highest level since 2018. The BDI has continued to climb throughout the year, reaching 5,650 in early October.

Since then, the index has fallen by 50%, hitting the lowest level since June. This has led some economists to argue that inflation could ease in the final months of the year.

Others have argued that falling shipping rates may ease inflationary pressure, but that labor shortages leading to higher wages are likely to keep upward pressure on prices, and even the Federal Reserve does not expect price increases to abbate until the second or third quarter of 2022.

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