US gas prices have fallen sharply since June.

US inflation could well drop to 5% over the coming months after a sharp fall in energy prices, Wells Fargo said.
Gasoline prices in the US have tumbled from above $5 a gallon in June to roughly $4 as of Tuesday.
Yet Wells Fargo said inflation is unlikely to keep tumbling, with prices such as rents set to keep growing.

Wells Fargo has said US inflation could well drop as low as 5% in the next two to three months after a sharp fall in energy prices.

US inflation unexpectedly surged to 9.1% in June, but since then oil and gasoline prices have fallen sharply as fears of an economic slowdown have taken hold. Gas topped $5 a gallon in June, but stood at $4.033 Tuesday.

“We would not be surprised to see the headline 12-month consumer price inflation reading post a sudden, large drop, maybe from 9.1% for June to 5% or 6% in the next two or three months,” the bank’s investment institute team said in a note to clients Monday.

Wells Fargo said the fact that the headline figure is a year-on-year comparison would likely contribute to a lower reading, given that prices started to surge in the fall of 2021.

However, inflation is unlikely to continue on such a steep downward path and would likely “grind” rather than “glide” lower over the next year, the bank’s analysts said.

And although commodities prices have fallen sharply, rents and other prices key to the economy are likely to remain stubbornly high, they noted.

Investors should therefore not expect the Federal Reserve to let up on its rapid interest rate hikes until inflation is well under control and is clearly heading back towards 2%.

“As its path lower becomes more of a grind than a glide, we believe inflation should continue to wear down household spending and economic and earnings growth,” they said.

“We doubt that the Fed will be as quick to ease its anti-inflation campaign as equity market enthusiasm may imply if inflation suddenly drops.”

Wells Fargo believes the US will tip into a “moderate recession” by the end of the year and that stock markets will remain volatile. It expects the S&P 500 to end the year between 3,800 and 4,000, compared with Monday’s closing price of 4,140.

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