While the war in Ukraine and sanctions on Russian oil mean energy prices will remain elevated and push headline inflation above 8% in March, it will still fall sharply later this year. Energy inflation and inflation in categories that saw intense shortages last year will drop as we reach the anniversary of last spring’s big increases. Used motor vehicle prices are already declining and there are broader signs of easing shortages, with the backlog of container ships waiting at US ports falling to a nine-month low. That should reduce some of the pressure on the Fed to tighten monetary policy aggressively at upcoming meetings. But with the more cyclically-driven categories of inflation, such as rent and food away from home still rising, we think the tightening cycle the Fed kicked off last week will need to continue well into next year, with rates reaching 2.75%-3.00% by end-2023.
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