We are once again forced to ask: have we passed the peak of maximum inflation pain? The question is spurred by the surprisingly large drop in factory input prices paid by manufacturers, as measured by the Institute for Supply Management’s (ISM) Prices Paid Index.

The index, which is generally seen as an inflation indicator, shed 14.2 points in December – its largest monthly drop in over 10 years, or since October 2011.¹ The pullback to the 68.2 level in Tuesday’s report indicates supply chain shortages are easing, which should bring some balance back to the supply-demand equation, and in turn help ease price pressures. (Note: ISM is a diffusion index, meaning that readings above 50 indicate prices are rising; progressively higher numbers above 50 indicate more widespread price increases.)

Does the ISM data have any bearing on the Consumer Price Index (CPI), which recently hit a 30-year high? The two data series do not have a one-to-one relationship, but their broad contours are similar.  The ISM Prices Paid Index has been falling for six months, suggesting that perhaps we may soon see an easing of CPI as well.

We need to be clear, prices are still rising in the ISM report driven by continued strong demand for factory-made goods. The upbeat news is that the price pressures are not as broad-based as they were last summer. The other caveat is that inflation at the factory level isn’t always passed on to consumers, so the current tumbling may not have a dramatic effect on your local store.

That said, the ISM report makes the inflation picture more interesting and messy than those blunt predictions that prices will run away to the upside. Many money managers, ourselves included, have been anticipating an easing in the rate of growth of inflation, however, that’s taken longer than we expected. The ISM is a sign that maybe our view will turn out to be correct, but we’re conscious of the danger that this could be another false sign of improvement, especially as omicron poses a threat to supply chains, transportation networks, and factories worldwide.

As for the Federal Reserve, we believe the ISM data is unlikely to change its march towards raising interest rates sometime this year. Higher inflation expectations are becoming ingrained among Americans, which risks sparking a vicious cycle where demands for higher wages feed into higher prices. And a rate increase may also be needed to cool consumer spending, which has been an important driver of inflation. (See recent Big Number reports: Many Americans Give Up on Inflation Remaining Tame, Inflation Sticker Shock Is Spreading, Booming U.S. Economy Snuffs Out Fed’s `Transitory’ View of Inflation)

For goals-based investors, we think the glimmer of improvement in inflation from the ISM data can serve as a reminder of a timeless investment adage: don’t overreact to short-term news when you’re investing for the long term. Emotion-based decision-making can do lasting damage to the probability of reaching your long-term financial goals. We think the better path is to adhere to your saving and investing plan while talking with your advisor about whether any changes are truly necessary in light of the news. In our view, staying the course can often be the hardest, but the best, thing to do.

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