Will 2024 See a Downside US Inflation Surprise?

December 4, 2023

Christos Charalambous, CFA

Benign disinflation has been well underway thus far in 2023 for the US economy, with CPI and core PCE Y-Y inflation declining from 6.5% to 3.2% and 4.9 to 3.7% respectively since the beginning of the year. For most of 2023, inflation has declined despite a robust labor market. The primary driver has been subdued goods inflation; especially as the composition of consumer spending shifted from goods to services. Looking ahead to 2024, there is still scope for goods inflation to decline further. Additionally, we expect wage and shelter disinflation to drive the final leg down in inflation’s descent towards the Federal Reserve’s 2% target.

In a post-Covid world, the global economy has undergone a normalization of supply chains, an increase in labor productivity and a decline in world trade prices. Peaking US job openings, a rebound in US labor force participation and a recent slowdown in labor demand have contributed to a deceleration of wage growth (which is a key driver of services inflation). Average hourly earnings growth has decelerated from 4.8% to 4.1% thus far this year. Moreover, leading indicators such as landlord rent asking prices point to a deceleration in shelter inflation, which compromises 42% of the Consumer Price Index. Demand-driven disinflation will likely also contribute to the final leg down in core PCE (Personal Consumption Expenditure) inflation in 2024, due to the lagged effects of past monetary policy and credit tightening on GDP growth and consumer spending. Despite increasing purchasing power and elevated asset prices, U.S. households are encountering certain headwinds in 2024, including declining excess savings, a restart in student loan payments, and rising credit card delinquencies.

In conclusion, all the aforementioned factors are contributing to a ceiling for inflation expectations as we enter 2024. A faster-than-anticipated drop in inflation will likely bring forward the market’s timeline for interest rate cuts and a policy pivot by the Federal Reserve. Such a scenario can act as a catalyst for a ‘soft landing’ in the U.S. economy and create a favorable backdrop for risk assets.


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The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

Core PCE Price Index y/y shows changes in prices for a fixed basket of consumer goods and services purchased by US residents in the given month compared to the same month of the previous year. This indicator is also called “PCE deflator”. It takes into account households’ actual and imputed spendings on durable and non-durable goods and on services. Prices for food and energy are excluded from the core index calculation due to their high volatility.  The index is benchmarked to a basis of 2009.

The PCE price index (PCEPI), also referred to as the PCE deflator, PCE price deflator, or the Implicit Price Deflator for Personal Consumption Expenditures (IPD for PCE) by the BEA, and as the Chain-type Price Index for Personal Consumption Expenditures (CTPIPCE) by the Federal Open Market Committee (FOMC), is a United States-wide indicator of the average increase in prices for all domestic personal consumption. It is benchmarked to a base of 2012 = 100. Using a variety of data including U.S. Consumer Price Index and Producer Price Index prices, it is derived from the largest component of the GDP in the BEA’s National Income and Product Accounts, personal consumption expenditures. Accounts, personal consumption expenditures.

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