Almost every major economic report or earnings announcement last week shed some light on the state of inflation, including how consumers and businesses were coping with surging prices. The bottom line: Though economists think we may be at or nearing a “peak,” prices have continued to swell at decades-high rates.

On Tuesday, we learned the Consumer Price Index (CPI) jumped by 8.5% year-over-year (YOY), the largest increase since December 1981. Surging food and energy prices drove gains.

Excluding food and energy prices, which tend to be relatively volatile over shorter-term periods, the so-called core CPI was up 6.5% YOY, the largest increase since August 1982.

On a somewhat encouraging note, core CPI was up just 0.3% month-over-month (MOM) from February, a significant deceleration from the 0.5% rate in February.

Ellen Zentner, chief U.S. economist at Morgan Stanley, laid out in a note to clients some key takeaways from March’s report:

“That was largely the result of a steeper decline in used car prices, which fell 3.8% on the month, while there [were] also some declines in prices for some technology-related goods, like video & audio products, and information technology commodities. That may be consistent with some opening of semiconductor supply chains recently, but there was little relief elsewhere, with further increases in apparel and household furnishings & supplies, which performed more in line with expectations.”

Many economists pointed out that services prices (excluding energy services) accelerated to 0.6% MOM, the biggest jump since October 1992. Some suggested this seemed to be driven by consumers going out to do things in a largely reopened economy after pausing more activities during the early phases of the pandemic.

“Transportation services skyrocketed 2.03% mom as airline fares spiked 10.7% MOM and car/truck rental soared 11.7% MOM, reflecting reopening pressures, and motor vehicle insurance climbed 0.7%,” said Alexander Lin, senior U.S. economist at BofA Global Research. “Lodging also jumped 3.3% along the same reopening theme, while recreation services grew 0.4% MOM.“

And while commodities like food and energy have their own categories in the CPI report, you can’t say they don’t affect the other categories in the “core.”

“Service sector inflation was mainly a commodity price disguised as a service, namely air fares,” Paul Donovan, chief economist at UBS Global Wealth Management, argued.

How consumers and businesses feel 🤦‍♂️

Everyone recognizes inflation is happening and no one is happy about it.

According to the National Federation of Independent Business, small business optimism deteriorated, as 31% of small business owners identified inflation as the single most important problem for their business. This was the NFIB’s highest reading for inflation concerns since 1981.

The New York Fed’s March survey of consumer expectations echoed this sentiment. Expectations for inflation one year ahead climbed to 6.6%, up from 6.0% in February and the highest reading in the survey’s nine-year history.

However, the longer-term outlook for prices may be improving. According to the New York Fed’s survey, consumer expectations for inflation three years ahead decreased to 3.7% from 3.8%.

Meanwhile, the University of Michigan’s index of consumer sentiment, which had been depressed due to worries about inflation, jumped in April as consumers’ prospects for the future improved.

“Perhaps the most surprising change was that consumers anticipated a year-ahead increase in gas prices of just 0.4 cents in April, completely reversing March's surge to 49.6 cents,” Richard Curtin, the survey’s chief economist, said on Thursday. “Retail gas prices have fallen since the March peak, and that fact was immediately recognized by consumers.“

While consumers still have concerns about inflation, they nevertheless continue to spend. Retail sales in March climbed 0.5% from February as excess savings helped pay for rising prices. And spending behavior continues to shift from buying stuff to doing stuff, which explains why prices have been surging in the “reopening” categories.

“Households spent freely at in-person establishments such as department stores, malls, and restaurants while continuing to pare back their online shopping,” Lydia Boussour, lead U.S. economist at Oxford Economics, wrote on Thursday. “And gas stations' sales surged by the most in a year amid higher prices at the pump.“

“The March retail sales report still reveals the resilience of consumer spending,” Wells Fargo’s Tim Quinlan and Shannon Seery wrote on Friday. “Inflation is not going away, but it will likely stop getting worse and that means less of a headwind for spending.”

What the economists are saying 🏔

While economists agree that inflation is likely to stay high for at least a while, many seem to also agree that the rate of price increases has peaked or is very close to a top.

In fact, if you look closely at what experts are saying, you’ll see what’s perhaps a peak of the word “peak” in their analysis (emphasis added):

“…our baseline forecast for monthly CPI readings reflects a ~0.3%/month trend in core CPI inflation through 3Q this year, so even if CPI settles into this new lower trend, the grind off of this peak in 12-month inflation is likely to be only gradual.“ - Morgan Stanley

“…with base effects set to become much more favorable and signs that monthly gains in core prices are moderating, we expect that to mark the peak.“ - Capital Economics

“We think another small increase in the annual rate is possible next month, but we are hopeful that the peak in CPI is close.“ - ING

“The YOY rates for headline inflation both headed higher this month, with headline jumping to 8.5% (8.54% unrounded) from 7.9% and core increasing to 6.5% (6.47% unrounded) from 6.4%. We think that both reflect the peak for yoy rates but expect inflation to cool to hot levels by year-end…“ - BofA Global Research

“Despite wide-ranging price increases again in March, we believe this likely marks the peak in post-COVID inflation.“ - Wells Fargo

“The 12-month changes in the overall and core CPI rose to new multi-decade highs, but we expect March to represent the peak of the cycle.“ - TD Securities

“Core CPI Inflation Likely Peaks at 6.5% in March“ - Goldman Sachs

“March CPI recap: Finally at the peak“ - Deutsche Bank

“Peak inflation“ - JPMorgan

That said, just because there seems to be a consensus among Wall Street economists doesn’t mean they’ll be right. Keep in mind that most of these folks didn’t expect inflationary pressures to persist for as long as they have.

And inflationary pressures continue to linger. Consider inventory levels. Last week, we learned that while business inventory levels climbed in March, they remain depressed relative to sales.

What to watch

Inflation has been a top concern for businesses and consumers for about a year. Yet, consumers have so far continued to spend increasingly, and businesses have generated record profits supported by fat margins. In fact, many companies have said they’ve actually struggled to keep up with demand.

In the coming weeks, the biggest corporations will be releasing their Q1 financial results, and many will share their outlooks for the near future. Investors will be interested to hear whether recent bullish trends will continue, despite challenges.

The stakes are particularly high, as worries about an impending recession have risen.

Recession is not the consensus forecast, however, as the economy continues to be supported by massive tailwinds.

And while analysts’ forecasts for Q1 earnings have come down in recent weeks, it’s important to recognize this behavior is actually in line with historical patterns. Also, historically, most companies will beat those expectations.

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More from TKer:

• 700+ reasons why S&P 500 index investing isn't very 'passive'

• The wrong question — and the right one — to ask about earnings headwinds

• What the yield curve inversion means for stocks

• Why it’s bad that consumers have an extra $2.5 trillion

• The biggest corporate red herring of the past year

• A key chart to watch as the Fed tightens monetary policy

Rearview 🪞

📉 Stocks fall: The S&P 500 fell 2.1% last week. It’s now up 6.8% from its February 24 low of 4,114, but still down 8.8% from its January 4 high of 4,818. For more on market volatility, read this and this.

🎈 Inflation is high and people are concerned: Last week, we got the March consumer price index, the March NFIB Small Business Optimism Index, the April New York Fed Survey of Consumer Expectations, the April University of Michigan Survey of Consumers, the March retail sales report, and the March business inventories report. I addressed all of these above. For more on inflation, read this and this.

🏭 Factory output is up: According to the Federal Reserve, industrial production in March rose by 0.9%, which was much stronger than expected. According to the New York Fed, manufacturing activity in the northeast accelerated significantly in April. For more on the growing economy, read this and this.

🏘 Mortgage rates jump: From Freddie Mac: “This week, mortgage rates averaged five percent for the first time in over a decade. As Americans contend with historically high inflation, the combination of rising mortgage rates, elevated home prices and tight inventory are making the pursuit of homeownership the most expensive in a generation.“

🥃 Workers are drinking: From the WSJ: “As businesses work to settle employees into offices, some are pulling out the stops—literally, on kegs, casks and wine bottles—in an attempt to make workplaces seem cool. Sure, executives could simply order people to return to their cubicles, and some have, but many want their workers to come back and like it.“

🤬 Workers are cursing: Also from the WSJ: “An analysis from Sentieo, a financial intelligence platform, found that expletives in transcripts of quarterly earnings calls, investor conferences and shareholder meetings rose to a five-year high in 2021, when 166 such transcripts contained foul language. In the first three months of this year, 50 transcripts contained expletives, up from 42 last year.“

Up the road 🛣

Earnings season picks up this week with Bank of America, JB Hunt, Netflix, IBM, Tesla, P&G, American Airlines, and Verizon among the big companies to announce quarterly financial results.

The week also comes with a slew of housing data: the April NAHB homebuilder sentiment index, the March housing starts and building permits report, and the March existing home sales report. Everyone wants to know what kind of impact is rising mortgage rates is having on the housing market.