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Medium-term US CPI Forecast Update
CPI growth expected to hit 2% in 2024: but not before a potentially unnerving period of stubborn growth
Overall policy backdrop remains conducive to lower inflation over time
With M2 seeing its largest fall since the Great Depression on the back of rate hikes and ongoing QT, the policy backdrop remains conducive to lower inflation. While Fed tightening has been somewhat offset by the federal government draining its TGA in 1H23 and subsequent heavy T-bill issuance draining “idle” funds in the Fed’s RRP facility, the strength of this offset is likely to taper as net coupon issuance rises.
Headline CPI expected to fall <2% in Dec 2024, core to see major disinflation
Given current trends, and a policy backdrop that’s expected to promote disinflation, I currently expect CY24 headline/core CPI growth of 1.9%/2.2%.
Current forecasts point to downside to the Fed’s 2024 PCEPI projections
For 4Q24, I expect YoY headline/core CPI growth of 2.2%/2.5%. This compares to the Fed’s current headline/core PCEPI estimates of 2.5%/2.6%. Since 2000, the headline/core CPI has averaged YoY growth 0.4%/0.3% above the headline/core PCEPI, indicating potentially significant downside to the Fed’s current PCEPI forecasts.
Potential confidence triggers point to an initial rate cut in 2H24
Considering when the Fed may be confident that inflation is sustainably on the path to 2%, I consider two key potential confidence triggers: annual core CPI growth <3.5% and <3.0% (page 20). I expect these levels to be met for the Fed’s 31 July 2024, and 18 December 2024 FOMC meetings, respectively.
4+ months of stalling YoY disinflation risks unnerving the Fed & markets
While I currently expect inflation to largely normalise by the end of 2024, and see the potential for material downside to the Fed’s current PCEPI estimates, YoY disinflation is forecast to stall over the next 4+ months (page 19). This could prompt further Fed action and reinforce “higher for longer” expectations, unnerving markets.
A recession would be expected to drive material downside vs these estimates
While my CPI forecasts include a downward bias on account of the current policy backdrop, they’re not intended to fully incorporate the impact of a potential 2024 recession. In such a scenario, I wouldn’t be surprised to see outright YoY deflation arise, and large rate cuts delivered.
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