Inflation Explained: The Good, the Bad and the Uncertain

Inflation in the United States has started to cool on an annual basis as a result of falling gas prices, but economists are looking for more evidence that the slowdown in price increases will become more widespread and pronounced.

So far, policymakers are receiving glimmers of good news, but the data remain far from conclusive.

Here are a few positive developments, a couple of worrying signs and a big, looming uncertainty that analysts will be paying close attention to in Tuesdays Consumer Price Index data and in the months ahead.

Good News

• Gas and other commodities. Falling prices at the gas pump have been pulling down annual inflation, and some food prices have also been easing, which could eventually seep through to retail prices. Thats good news for consumers, who tend to be sensitive to transportation and grocery costs. But for Federal Reserve officials, lower gas and food prices would be a welcome, but not decisive, development. Because those costs jump up and down, central bankers tend to look past them when trying to get a sense of where inflation is headed.
• Cars and other physical products. A more meaningful positive development is taking place in goods prices, which are showing early signs of cooling off. Notably, price increases for used cars, which helped drive the pop in inflation that began last year, are beginning to pull back. Inflation for goods is slowing partly because consumers are shifting their spending away from products they snapped up during the pandemic and back toward services, like restaurant dinners and vacations. It is also partly because supply chain issues that have plagued producers for more than a year have shown signs of abating, though they are not back to normal.