What to expect from inflation for the rest of 2023

The Fed is generally pleased with the slowdown in inflation in the US economy over the past few months, but will it continue? As 2023 draws to a close, there are some risks to the inflation trajectory, particularly housing, services and energy which together will likely define the inflation trajectory.

Recent trends

So far in 2023, inflation has generally declined. Inflation in the headline consumer price index started the year at an annual rate above 6%, and by September it was below 4%. The core CPI, which excludes food and energy prices, also fell during 2023, but at a slower pace.

Upcoming inflation data releases

For the remainder of calendar year 2023, we will see two more IPC releases, for the month of October, released on November 14, and, for the month of November, released on December 12. Data from the Wholesale Producer Price Index will be released a day later, in November. respectively on December 15 and 13. Additionally, the Personal Consumption Expenditures Price Index, which is considered the Fed’s preferred measure of inflation, will be released as part of the Personal Income and Spending report later this month on November 30 for October data and December 22 for November data.

Nowcast

Last Cleveland Federal Reserve Nowcast October’s inflation suggests that headline inflation could slow further, in part as the recent surge in prices for some energy products recedes from September highs.

However, underlying inflation, excluding the price of energy and food products, could be generally stable compared to September, at 4.1%. That would be a slight concern for the Fed, which hopes inflation will return to its 2% annual target. The Fed has indicated it would consider raising rates further if progress on inflation stalls. If immediate forecasts are confirmed and inflation appears stuck above 2%, then the Fed could consider another interest rate hike in December or January.

Housing Trends

In addition to energy price volatility, underlying trends in the real estate sector will determine the direction inflation takes over the coming months. This is because housing, whether through a mortgage or rental fees, is a significant expense for most households and inflation calculations reflect this. Housing weighs heavily in inflation indices.

The general trend for 2023 has been for housing cost inflation to rise at a slower rate as mortgage costs rise, but house prices have been trending higher since the spring of 2023, partly due to the reduction in supply. This rebound in prices could reverse, at least temporarily, the trend of housing disinflation, thereby fueling inflation.

Most economists expect that rising mortgage costs will eventually put pressure on house prices, but we haven’t really seen that yet, nor in recent house price data. real estate, nor in the inflation figures.

Salary trends

Wage growth has slowed in recent months. This should help lower the prices of services. However, in absolute terms, wage growth remains high. According to Tracking Atlanta Fed Wage Growth, wage growth was above 5% in September 2023. This suggests that services inflation may continue to slow, which is something the Fed is monitoring. However, it is not certain that wage growth of 5% will allow overall inflation to fall to 2%.

The main question

It is clear that US inflation is down significantly from record levels in 2021-2022, which is good news for the Fed and the US economy as a whole. However, it is unclear whether inflation will return to the Fed’s 2% target in the near term, or whether inflation could prove stable at a higher level.

Some also argue that economic shocks could push inflation even higher from current levels. 2023 will almost certainly be a year of slowing overall inflation, but whether this trend will continue at the end of the year is less certain and depends to some extent on housing market trends.

The Fed will be watching closely. If inflation does not continue to move closer to its 2% target, then another interest rate hike is possible, although the Fed is expected to keep rates steady in November.