High inflation is sticking around, but it likely peaked months ago. Here’s why


American consumers may still be feeling the pinch of higher prices, but the worst effects of the COVID-19 pandemic-induced inflation are probably over.

The price of consumer goods and services continues to climb when measured on an annual basis, up 7.5% as of January according to the latest consumer price index report released Thursday. That’s the biggest year-over-year jump in a whopping 40 years. Really bad, right?

The measure of so-called core inflation, which excludes food and energy costs that can be more volatile, rose by 6% over the past 12 months.

But that’s not the full picture. Month-to-month inflation was up 0.6% in January, about the same rate seen in December but down significantly from last October when inflation rose 0.9% as COVID-19 cases spiked across the U.S and interrupted business operations and supply chains.

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The monthly inflation rate is a better indicator than the yearly inflation rate at this point. That’s because the latest annual inflation increase is due, in large part, to the fact that it’s being compared to the cost of consumer goods in January 2021, when it was just a 1.4% annual increase.

There’s also the matter of how the Bureau of Labor Statistics weights different goods and services to build the consumer price index. The CPI is a measure of the average cost consumers pay for a basket of goods over time. Housing costs, for example, typically have a bigger influence in calculating the CPI than food prices. But Americans’ spending patterns shift over time, and so the BLS updates the CPI on an annual basis–similar to how changes in the U.S. population are reflected in annual updates to the labor reports.

The 2022 update likely added about 0.02 percentage points to the yearly inflation rate, says Mark Zandi, chief economist at Moody’s Analytics.

“CPI inflation has peaked on a month-to-month basis, and it will moderate as the year progresses and as the pandemic becomes less disruptive, and supply chains and labor markets normalize,” Zandi tells Fortune.

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When looking at the different goods and services, the prices of food, electricity, and housing were the biggest drivers of the rising inflation. Food costs, including expenses related to dining out and meals prepared at home, rose 0.9% in January and 7% over the past 12 months. Grocery prices alone rose 7.4% over the past 12 months.

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Energy prices rose 0.9% in January, yet holding steady from December rate and down from previous highs. But looking annually, prices are still up 27% over the previous year. The BLS noted that the increases in electricity costs, up 4.2%, were partially offset by declines in gasoline and natural gas costs.

Housing costs, which is traditionally one of the largest household expenses, rose 0.3% in January, a slightly slower rate than the 0.4% in December. Yet within that sector, rents increased 0.5% in January, the biggest increase in 20 years. Homeowner costs rose 0.4%. Year over year, housing costs are up 4.4%.

So when can Americans expect inflation to return to the normal, 2% annualized rate targeted by the Federal Reserve? On a year-over-year basis, Zandi predicts inflation to be back to the Fed’s target by spring 2023.

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