Flash Macro: U.S. Inflation

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Headline U.S. CPI data for December came in at 3.4% year-over-year, above consensus and clearly above the Fed’s two percent target. Drivers of the hawkish beat included a surprisingly strong reading for core goods, as well as ongoing elevation in the critical shelter inflation component of core services. On net, however, this report leads to no change to our +2.6% CPI forecast for 2024, which is now in-line with consensus. We continue to see core inflation cooling towards the mid-two percent range by the end of the year, as shelter inflation catches down to real-time rent measures and core goods prices continue to moderate.

Further, details of this report and other recent economic data suggest that Fed rate hikes are doing their job. Importantly, the breadth of inflation and job gains are both slowing, and we think the evolution of the data will give the Fed confidence that the two percent real rates it has achieved are sufficiently restrictive. As such, we expect the Fed to walk nominal rates lower in the second half of the year. So, despite the hawkish report, however, we now expect four cuts in 2024 (versus three previously) followed by three more in 2025.

That said, we want to be clear: We think markets are likely putting too much emphasis on the view that cyclical disinflation is upon us. Depending on the day, our rates forecasts still remain 25-50 basis points above near-term market pricing, which we continue to think is too dovish relative to the resilience we are seeing in price and wage inflation (we see CPI is settling at a higher resting heartrate this cycle, a concern which is likely shared by policymakers).

EXHIBIT 1: Despite the December Inflation Reading, the Breadth of Sectors Showing Elevated Inflation Is Back Near Post-Pandemic Lows…

% of CPI Sub-Components Increasing at 3+% Annualized

Chart of Percentage of CPI Sub-Components Increasing at 3+% Annualized
Data as at December 31, 2023. Source: U.S. Bureau of Labor Statistics, Haver Analytics.