The Fed is broadly satisfied with cooling inflation for the U.S. economy over recent months, but will it continue? As 2023 draws to a close, there are some risks to inflation’s trajectory, specifically housing, services and energy will in combination, likely define inflation’s path.
Recent Trends
So far in 2023 inflation has generally moved lower. Headline Consumer Price Index inflation started the year running at an over 6% annual rate, and as of September is under 4%. Core CPI, which strips out food and energy prices, has also moved lower, but at a slower rate.
Upcoming Inflation Data Releases
For the remainder of calendar 2023 we’ll see two more CPI releases, for October, on November 14 and, for November, on December 12. Wholesale Producer Price Index data will come a day later on November 15 and December 13 respectively. In addition, the Personal Consumption Expenditure Price Index, which is considered the Fed’s preferred inflation metric, will be released as part of the Personal Income and Outlays report later in the month on November 30 for October’s data and December 22 for November’s data.
Nowcasts
Latest nowcasts from the Cleveland Federal Reserve for October inflation suggest that headline inflation may cool further, in part, as the recent spike in certain energy prices drops back from September highs.
However, core inflation, with energy and food prices removed, may be broadly flat compared to September at 4.1%. That would be a concern for the Fed hoping for inflation returning to their 2% annual goal. The Fed has indicated that they would consider raising rates further if progress on inflation stalls. If nowcasts hold and inflation appears stick at over 2%, then the Fed may contemplate an addition interest rate hike in December or January.
Housing Trends
Aside from volatility in energy prices, underlying trends in housing are likely inform the direction inflation takes over the coming months. That’s because housing, whether via a mortgage or rental costs, is a major expense for most households and inflation calculations reflect that. Housing carries a large weight in inflation indices.
The general pattern for 2023 has been shelter cost inflation easing as mortgage costs rise, but home prices have been trending up since spring of 2023 in part due to reduced supply. This may cause the trend of housing disinflation to reverse, at least temporarily, fueling inflation.
Most economists do expect rising mortgage costs to ultimately put pressure on home prices, but we haven’t really seen that, either in recent home price data or inflation figures yet.
Wage Trends
Wage growth has eased in recent months and that should help cool prices for services. However, in absolute terms wage growth is still relatively high. According to the Atlanta Fed’s Wage Growth Tracker, wage growth was over 5% for September 2023. That suggests services inflation may continue ease, something the Fed is watching for. Though it’s unclear that wage growth at 5% will enable overall inflation to reach 2%.
The Main Question
It’s clear U.S. inflation is down materially from peak levels of 2021-2022 and that’s welcome news for the Fed and economy. However, it’s unclear if inflation will return to the Fed’s 2% target in short order, or whether inflation may prove sticky at a higher level before it gets there.
Some also argue that economic shocks could push inflation up further from current levels. 2023 will almost certainly be a year of cooling inflation in aggregate, but whether that trend continues as the year draws to a close is less certain and depends to some degree on trends in the housing market.
The Fed will be watching closely. If inflation does not continue to move closer to their 2% goal, then a further interest rate increase is possible, even though the Fed is expected to hold rates steady in November.
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