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Some costs are finally coming down. What does that mean for inflation?

From raw materials to shipping, falling costs are good news for businesses, but it’s important to note that prices are still historically high.

Some costs are finally coming down. What does that mean for inflation?
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Both businesses and consumers have seen inflation rapidly erode their purchasing power in recent months. But there’s good news, particularly for businesses: Costs appear to finally be cooling off. From raw materials to shipping, here are some of the signs that businesses are feeling the financial vise loosen:

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  • Shipping costs from Asia to west coast U.S. ports have fallen more than 60% since last September, according to Axios, citing data from Freightos.
  • Business input costs rose at the slowest rate in four months as demand eases and pressure on supply chains ticks down, per the Global Purchasing Managers’ Index, which tracks costs from companies around the world.
  • Prices for raw materials and commodities (such as corn, wheat, lumber, cotton, and more) are down significantly, reports the Wall Street Journal.
  • Oil prices have also fallen, down from more than $120 per barrel to around $100 over the past month.

While many costs have fallen, it’s important to note that prices do remain historically high. There is still a long way to go before prices adjust to pre-pandemic norms—if they do at all.

“We need to put these costs in perspective—transportation costs, as a percent of the cost of goods sold, have basically doubled since the COVID-related supply bottlenecks began and are only a marginal part of the overall input price,” says Scott Colbert, the chief economist and director of fixed income at Missouri-based Commerce Trust Company. “We doubt the overall supply chain gets back to anything approaching normal for several years,” he says.

The cooling of costs is largely, though not completely, the result of the Federal Reserve’s actions on interest rates. The Fed’s increases were designed to slow demand for goods and services among both businesses and consumers by making it more expensive to borrow money, and it appears to be having an effect.

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Lower demand has, evidently, taken some pressure off of supply chains, among other things, which have led to lower costs in the short term. Interestingly enough, one area in which businesses are not seeing savings yet is on labor costs, as the latest unemployment report for June showed payrolls increasing by 372,000, the unemployment rate holding tight at 3.6%, and, most significantly, overall wages rising more than 5% year-over-year. That’s still below inflation (8.6%), but is yet another increasing cost for businesses to contend with.

The lingering question, though, is whether price increases will slow for consumers in the coming months. That’s already happening, Colbert says, as “the core CPI has fallen to 6% from this cycle’s recent high of 6.5% in March.” Further, gas prices have also fallen—down more than $0.30, on average, from a month ago.

Another outstanding question: Are we headed for a recession?

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Colbert says that, given the strong jobs market, a recession would be a historical aberration. “Historically, the U.S. has never entered a recession while we are still growing jobs,” he says, adding that it’s important to take into account that jobs reports don’t paint a whole picture of the economy’s strength. That said, though, Colbert says that “with job openings high, layoffs low, and demand for labor firm, it’s hard to envision a recession is on our doorstep.”

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