Renewed Inflation Risk May Be Mounting on the Goods Side

Throughout the Federal Reserve’s rate-hiking–turned rate-cutting–cycle, beginning in March 2022, the focus has largely centered on progress combating the services side of inflation. There are several reasons for this, including 1) services inflation makes up a large portion of the overall inflation basket (about 64% of CPI); 2) services inflation is stickier than goods inflation and thus more indicative of future prices in addition to current ones; and 3) the Fed tends to have more ability to shape services inflation than goods inflation. Monetary policy targets domestic demand and wage growth, which matter quite a bit for services prices, whereas goods prices are determined in part by global supply chain dynamics, which the Fed cannot impact. 

Finally, particularly in 2023 and 2024, the focus on services inflation has also been due to the fact that it has been only these components that remain above the levels conducive to the Fed’s 2% target. In fact, durable goods inflation has been negative since December 2022, while nondurable goods annual price growth has been below 2% in all but two months since May 2023. Meanwhile, shortly after the Fed began cutting rates, services inflation sits well above target, at 4.7% as of October. 

Will goods inflation flip from helper to hindrance?

The element of softer goods inflation has therefore been key to enabling sustained progress in taming inflation. Just as inflation approaches its target level, Morning Consult’s proprietary indexes tracking supply chain pressures from the consumer perspective are starting to show signs of potential tightening. 

The Delivery Delays index, which tracks the prevalence of consumers reporting lengthening wait times on goods ordered online, has quietly been climbing for most of the past year. While the index remains well below its historical high from mid-2022, its October value was the highest reading since March 2023. Not only does this consumer-based measure pick up a tightening signal on deliveries, but businesses seem to be registering a need for adding more workers as well: The annual pace of hiring growth for transportation and warehousing services has closely mirrored the path of the Delivery Delays index (the measures have a historical correlation coefficient of .84). 

Signs of growing supply tightness are also visible in Morning Consult’s Purchasing Difficulty index scores across many categories. This index tracks the share of consumers who said they had trouble obtaining various items they sought to purchase, both in stores and online. Product shortages tend to be the main driver of higher purchasing difficulty scores, though the question wording underpinning the index score does not rule out other potential inhibitors. Over the past two years, purchasing difficulty has generally trended lower across categories as supply chain pressures abated and softer goods demand kept shelves well stocked. However, in recent months, many products included in the core goods component of inflation have registered an uptick in reported purchasing difficulty. In most cases, the three-month moving average reversed trend in July, pre-dating the September and October supply shocks of hurricanes and temporary port closures. 

Helping to explain this trend, retailers’ inventory-to-sales ratio, excluding autos, has retreated farther below its pre-pandemic norm in 2024. This tightening of supply may be beginning to permeate the consumer buying experience.

2025 risks are mounting 

Both the Delivery Delays and Purchasing Difficulty index scores remain well below levels reached in the latest supply shocks, and consumer demand for goods remains softer than it was leading up to the recent goods inflation surge. Looking ahead to 2025, however, proposed policies from the Trump administration could impact price and supply dynamics as well. Many of the same goods currently experiencing an uptick in Purchasing Difficulty, such as apparel, home furnishings, and autos, are expected to face significant upward price pressures should Trump’s proposed tariffs be implemented. Tax cuts could also have a stimulatory effect on consumer spending, potentially boosting goods demand and prices. Should these trends toward tighter supply continue, particularly in tandem with the incoming administration’s proposed policies taking effect, goods price growth could flip from its current role as an essential helper in taming inflation to an upside risk reversing progress. 

A quandary for the Fed?

The fact that core inflation currently remains above target, and subject to further upside risks, is not necessarily an argument against continued rate cuts. The Fed’s dual mandate requires attention not only to price growth, but to labor conditions as well, and unemployment has markedly increased along with other metrics of labor market softening. Additionally, it takes time for the effects of elevated interest rates to fully play out in the economy, and the all-important housing inflation component digests prices on a delayed basis, allowing reason to believe improvement in services inflation will continue. Services inflation above 2% was the long-term norm in the years before the pandemic, offset by softer goods price growth helping moderate growth for the overall basket. Given the chronic undersupply and unaffordability of housing, which makes up about a third of total CPI, a similar scenario remains the most likely path to achieving a 2% average inflation rate going forward as well. While persistent price sensitivity and modest goods demand from consumers could continue putting downward pressure on goods prices, the twin risks of tightening supply chains and potential implementation of tariffs and tax cuts increase the risk that goods components undermine Fed control over inflation during the next year.