U.S. inflation is likely to slow further this year, ending the year near the Federal Reserve’s 2% target. This is because the effects of the economic turmoil caused by the coronavirus pandemic are expected to further fade, and prices of some goods are expected to decline.
The trend of slowing inflation is steadily pushing the U.S. Federal Reserve to cut interest rates, and they are expected to do so as early as March. On the other hand, for US President Biden, who is seeking re-election, if the decline in inflation goes hand in hand with the economic slowdown, it will be difficult to boast about his achievements in the election campaign.
The December US Consumer Price Index (CPI) data to be released on the 11th will likely be a foreshadowing of the disinflation to come in the coming months. Prices of goods have generally stopped rising, and some, such as automobile prices, are falling.
US Goods Prices Are Now Falling After a Pandemic Surge
The decline will help hasten the return of inflation to the Fed’s 2% target
Source: US Bureau of Labor Statistics, Bloomberg
“Prices are likely to be very subdued this year, and the downward pressure on prices from improved supply conditions is also likely to continue,” said Alan Detmeister, economist at UBS Investment Bank. “We’re going to see a lot of slowdown in the near term and a more gradual slowdown further down the road,” he said.
According to a Bloomberg survey, December’s CPI data is expected to slow core inflation, which excludes food and energy, to 3.8% from a year ago. If that happens, it will be the slowest growth since May 2021.
Inflation has slowed in recent months faster than economists expected. This unexpected development was largely due to the six consecutive months of decline in core goods prices until November. From February 2020 to May 2023, it skyrocketed by about 16%. This was because prices for items such as cars and clothing were soaring due to a surge in consumer demand and supply chain disruptions.
In the minutes of the US Federal Open Market Committee (FOMC) meeting (held December 12-13 last year) released on January 3, there was a discussion on whether supply chain improvements would continue to contribute to suppressing prices. It was shown that Economists also question whether there is still room for improvement on the supply side.
“This is a source of great uncertainty,” said Sarah House, senior economist at Wells Fargo. Inflation initially rose faster than models and past experience predicted, but it may now slow just as quickly.
However, there are still some items that are still rising, including services. Analysts are focusing on trends in housing costs, which are the largest component of the CPI and account for nearly one-third of the total. Housing cost growth peaked at 8.2% in the 12 months to March 2023, well above the standard range of 3-3.5% in the pre-pandemic years.
US Shelter Inflation Is Taking Longer to Recede
‘Core’ inflation excluding shelter has fallen back to near pre-pandemic pace
Source: US Bureau of Labor Statistics, Bloomberg
Since then, it has fallen to around 6.5% as of November, and the decline is expected to continue going forward. But progress has been relatively slow. This is because housing costs are a lagging indicator and have not yet fully factored in the slowing rate of rent growth in 2023. The reason behind this is that rent changes can only be seen when a rental contract is renewed or when a tenant moves.
“Monthly rent increases should be very close to the pre-pandemic pace in the second half of this year,” said UBS’s Detmeister.
According to a mid-December Bloomberg survey of economists, the U.S. Federal Reserve’s most important indicator of inflation is expected to fall to 2.2% by the end of the year, approaching its pre-pandemic norm.
Consumer surveys showed improving sentiment regarding the inflation outlook. However, this may be partly due to the drop in gasoline prices from October to December (fourth quarter) last year. Food prices are still rising year-on-year, but they are no longer as large as they used to be.
The decline in inflation itself should be a tailwind for President Biden heading into the November presidential election. Polls show that voters consistently cite prices and the economy as their top concerns.
But many, including UBS and Wells Fargo, say higher interest rates will hurt growth and employment this year, and for Mr. Biden, a weakened job market could offset the benefits of slower inflation. .
“The extent to which growth in the job market can be sustained, not just the inflation rate, will determine the future of consumer confidence,” said Wells Fargo’s House.
news-rsf-original-reference paywall">Original title:US Inflation Is Set to Fade in 2024 as Goods Prices Keep Falling(excerpt)
2024-01-10 14:23:58
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