Have We Reached Peak Inflation?

John Smith
January 1, 2023
5 min read

Inflation has been on the rise this year, with consumer inflation reaching 40-year highs in recent months. Why is this significant?

Besides causing higher prices, inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond's fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise as we’ve seen this year.

The Fed has been under pressure since late last year to take action to address inflation, and in response they hiked their benchmark Fed Funds Rate by 25 basis points at their March meeting and 50 basis points in May. Note that the Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. Hiking the Fed Funds Rate will actually be a good thing for mortgage rates, as the Fed curbs inflation and preserves the fixed return a longer data Bond provides.

With the recent Fed hikes, you may be wondering if inflation has peaked. To answer this question, let’s first look at how inflation is calculated.

Inflation is calculated on a rolling 12-month basis. This means that the total of the past 12 monthly inflation readings will give us the year over year rate of inflation. Since it is on a rolling 12-month basis, the most recent report, for example May 2022, will replace May 2021 in the calculation of annual inflation.

The chart below shows inflation readings for the Consumer Price Index for 2021. We can see that the numbers for May and June 2021 are high. Many in the media are saying that inflation will have peaked once the numbers for May and June 2021 are replaced, since the new numbers for 2022 could come in lower.

When Will Inflation Peak?


But that’s not the whole picture!

As you can see, there was a big lull in inflation in July, August and September 2021. It’s likely that these numbers from last summer will be replaced with higher inflationary numbers for 2022.

This is why inflation could continue to be a problem over the summer months, until we reach peak inflation in October when the numbers from 2021 move higher and the new numbers for 2022 could come in lower.

In addition, the Fed is expected to continue hiking the Fed Funds Rate at their upcoming June, July and September meetings. As these rate hikes take hold, they will give people an incentive to put more money into savings, which takes money out of the economy and also slows pricing pressure down.

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