A 5-step timeline suggests inflation is set to cool down into early 2023 as favorable year-over-year comparison come into focus

• The persistently high inflation in 2022 is set to reverse over the coming months, according to Raymond James.
• The investment firm outlined a 5-step timeline as to how disinflation will take over the upcoming CPI reports.
• Favorable year-over-year comparables in late 2022 and early 2023 will spark a decline in inflation reading.

Investors have been conditioned to expect stubbornly high inflation prints in recent months, but a combination of factors suggest disinflation will be apparent heading into next year, according to Raymond James.

Raymond James chief investment officer Larry Adam said in a Friday note that a five-step timeline will help deliver lower inflation readings into late 2022 and early 2023.

"It is difficult to pinpoint exactly when the 'official' government-released inflation statistics will reflect the on-the-ground improvements we are detecting, but we still believe that a more consistent inflation easing will occur in the final months of 2022 and early months of 2023," Adam said.

The confidence in Adam's call is derived from five factors investors should consider.

1. Commodities

Despite the initial pop from Russia's invasion of Ukraine, energy prices have eased as worries mount about an imminent slowdown in global growth, which would ultimately dent demand for oil and gas. And while natural gas price increases won't help consumers, "the near double weighting in CPI for oil and gasoline should offset further natural gas gains," Adam said.

2. Goods

The supply chain logjams of the pandemic have mostly eased, and that should help lower the prices of goods. Adam highlighted that one year ago there were 100 ships backed up at coastal ports in California, but today that number has declined to just six. Additionally, an inventory glut should lead to steep discounts for consumers heading into the holiday season.

"With consumer more price conscious and retailers remaining saddled with excess inventories, more discounting will likely be needed to entice spending," Adam said, adding that such a move would help tame goods inflation in the months ahead.

3. Services

A surge in higher travel costs has led to some consumers pulling back on their upcoming trips, according to a survey highlighted by Adam. Specifically, the survey showed that 33% of respondents had canceled an upcoming trip due to higher costs.

"The uptick in prices for airfare, at hotels, and in restaurants may dim the ability and willingness to travel and lead to services prices decelerating," Adam said.

4. Food

The UN Food Price Index has dropped for six consecutive months, with price improvements being seen in beef, chicken, oils, and milk, Adam highlighted. Still, grain prices have remained elevated due to droughts and the Russia-Ukraine war.

But the UN's decision to fast-track inspections of Ukraine's grain shipments, combined with US farmers adjusting crop choices to meet demand for certain grains, should help lower prices further.

"Supply and demand should begin to normalize, and at a minimum, slow the pace of food price increases and favorably impact grocery bills and restaurant costs in the fourth quarter and early part of 2023," Adam said.

5. Rents

Ongoing weakness in the housing market should flow through into official government inflation readings by mid-2023, according to Adam. And current on-the-ground readings suggest rent prices will see a material deceleration once they flow through into the official CPI reading.

"Bottom line: Inflation is likely to decelerate, but it will occur in a multi-stage process. On a positive note, the next two months are likely to see the year-over-year pace decline. Why? Favorable comparables. For example, the headline CPI index will 'roll-off' the two hot monthly inflation prints seen in October (+0.9%) and November (+0.7%) of last year," Adam concluded.