Skip to content

October 2023 / VIDEO

The Inflation Battle May Not Be Over

Key Insights

  • U.S. inflation has declined from its June 2022 peak, leading some to speculate that the Fed could soon switch to a more accommodative monetary stance.
  • We believe that an upward trend in some inflation categories, such as energy, could mean higher interest rates for longer than expected.


In June 2022, the U.S. CPI reading reached a whopping 8.93%, a number that left many consumers; investors; and, most notably, the U.S. Federal Reserve very concerned. But over the subsequent 12 months, inflation went on a steady march downward, with CPI ending June of this year at 3.09%. And while the last two readings have been higher, many analysts have noted that core CPI, which excludes the volatile food and energy categories, has continued to trend lower.

As a result, concern about inflation is fading—which has led some investors to conclude that the Fed is done hiking interest rates and will soon be in cutting mode.

We are not so sure.

CPI is typically reported on a year-over-year basis. The August report of 3.71% means that the consumer price index was 3.71% higher than it was a year ago. This helps remove seasonal effects from the number and also makes it less influenced by short-term moves that may prove temporary.

However, the short-term moves may offer more information about the current state of inflation than the year-over-year number, especially at inflection points. One effective way to examine short-term trends without putting too much weight on one individual reading is to calculate the three-month moving average of CPI, instead of the year-over-year number.

When we do this, we can see that the current inflationary trends are not quite as encouraging. In fact, between July and August, the three-month moving average rose from 1.90% to 3.98%.

The good news is that, even when viewed through this shorter-term lens, the shelter category remains on a steady downward trend. This is important because the shelter category makes up a very large portion of the CPI basket—accounting for 34% of CPI as of August 2023. We can also take comfort in the fact that the forward-looking indicators point to this trend continuing over the rest of the year.

Unfortunately, the same cannot be said for other categories, all of which could be facing upward pressure in the near to medium term. The most concerning category is energy, which has recently taken a sharp turn upward. In August, the contribution to CPI from energy ended a 12-month-long negative streak, as it spiked from -0.76% to +1.97%.

And this trend looks likely to continue. Not only have oil prices climbed sharply since July, but the global supply response to higher oil prices has been surprisingly modest, as evidenced by the decrease in rig counts over the past year. Meanwhile, oil inventories have been falling rapidly, with U.S. inventories now at low levels. In fact, when the decrease in the strategic petroleum reserve is included, U.S. oil inventory is at a level not seen since the 1980s. There are also early indications that oil productivity levels in the U.S. have peaked after increasing for more than a decade.

The steady decrease in CPI readings may be coming to an end. Going forward, we are set up for a tug of war between easing shelter prices and rising prices in other categories—particularly energy. This is likely to put pressure on the Fed to keep rates at elevated levels for longer than many investors may be expecting.

As a result, our Asset Allocation Committee has recently increased its position in real assets, which includes a large allocation to energy-related equities, while also decreasing the allocation to long-term U.S. Treasury Bonds, which could suffer if interest rates remain higher for longer.

Additional Information

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.


This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.  

It is not intended for distribution to retail investors in any jurisdiction.

USA—Issued in the USA by T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which is regulated by the U.S. Securities and Exchange Commission. For Institutional Investors only.

© 2023 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.

Previous Article

October 2023 / MARKET EVENTS

Global Spotlight on Efforts to Avoid Escalation of Israel-Gaza Conflict
Next Article


How We Design a Blend Solution for Target Date Investors