Latest Inflation Indications
The rate of inflation indicated by the Personal Consumption Expenditures Price Deflator (PCE Price Deflator) declined to 3.0% with the October data. Excluding food and fuel (as the Federal Reserve likes to do) yields “Core Inflation.” Core Inflation, at 3.5%, is running higher than total inflation. Normally, the Core Inflation gauge is used because it excludes food and fuel, which are inherently more difficult for the Fed to control. Core Inflation is higher right now because food inflation is lower than the Core figure, and energy prices are running lower as well.
ITR Economics is projecting that the disinflation will continue to be uneven but still yield lower inflation as we progress through 2024.
The Personal Consumption Expenditures October data (measured in nominal dollars) showed some softening in consumer activity. The September-to-October change in Expenditures was milder than in recent years. The change harkened back to 2015, 2016, and 2017. These were mildly recessionary years that provided much of the framework for what we are projecting for 2024.
Personal Consumption Expenditures on a year-over-year basis were up 5.3% in nominal dollars and 2.2% in inflation-adjusted dollars. Both year-over-year percentages are in Phase C declining trends.
- Inflation dissipated further in October.
- Consumer activity eased in October.
- Both trends are projected to extend through 2024.
Decline in 2024
Lessening inflation in 2024 combined with decreasing economic activity will provide the Fed with the circumstances needed to lower interest rates. It will likely take concern over the health of the US economy for the Fed to lower rates.
Our analysis of the trends for Retail Sales, Capital Goods New Orders, Capacity Utilization, Inventories, the slowing rate of wage growth, and corporate profitability issues will present a picture of an economy in a mild recession. The premise of achieving the proverbial soft landing for the economy will no longer be a viable reason for leaving interest rates high.
Another factor in our analysis is that the rising trend in Employment is losing momentum. A weakening job market is something the Fed has wanted to see since it began the current quantitative tightening.
- Signs of our forecasted mild recession for 2024 are present.
- The weaknesses will become more pronounced as we go through the first half of 2024.
- Expect employment to slow further and unemployment to edge higher.
Conclusion
- Today’s expectation that the Fed will hold rates high through 2024 will likely give way to a growing probability of decline in the fed funds rate in 2024.
- Weakening trends are already evident to support the projection of declining interest rates in the coming year.
- Mild recession will mean proportionately modest decline in interest rates.
- Read the December 2023 Trends Report™ Executive Summary for a longer-term view of changing inflation and interest rates.
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