Inflation should continue to move lower in 2024

Inflation should continue to move lower in 2024


Derek Hamilton

  • Managing Director, Economist – Ivy Equity Boutique
  • Read bio

In our last insight we looked back on 2023 and reiterated our forecast for a recession in 2024. We reflected on inflation, noting that the annualized 3-month percent change for the core US Consumer Price Index (CPI) ended 2023 at 3.3%, down from 4.3% at the end of 2022. Most investors focus on core inflation because it takes out the volatile swings in food and energy, which gives a better sense of the underlying inflation trend. We believe that inflation has further to fall in 2024.

We like to look at inflation in three parts: core goods, core services ex-housing, and housing.

  • Core goods inflation has already slowed, with the 3-month percent change showing deflation (falling prices) over the last five months and the year-over-year change essentially at zero. Goods prices have stopped increasing following a normalization of supply chains. Until now, US consumer spending on goods has continued to be quite strong. We expect the growth of goods spending to weaken from very strong levels, which should help keep core goods inflation muted.
  • Core services ex-housing inflation has peaked but remains elevated. Both the 3-month and year-over-year percent change are still over 5%. Strong wage growth in 2022 and 2023 helped keep inflation high, though we expect wage growth to slow in 2024. In addition, services inflation typically moves with the growth of the domestic economy, which we also expect to slow in 2024.
  • Housing inflation is one of the main reasons we expect inflation to slow further in 2024. While the housing portion of the CPI can be influenced by changes in housing prices, it is not calculated using housing prices directly. Instead, the housing CPI uses actual rents and imputed rents, which are in other words, what people are paying to rent their residence and what they would theoretically pay if they rented instead of owned. This methodology tends to cause a delay between actual rents and the housing CPI. As shown in the chart below, the growth rate of actual rents slowed dramatically in 2023, which should lead to a slower rate of housing inflation in 2024.

Housing CPI

>Housing CPI

Sources: Macquarie, Macrobond, US Bureau of Labor Statistics (BLS), S&P Global, Zillow, National Association of Realtors (NAR).

Chart is for illustrative purposes only.

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Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

The core US Consumer Price Index (CPI) is a measure of inflation that is calculated by the US Department of Labor, representing changes in prices of all goods and services, excluding those with high price volatility, such as food and energy, purchased for consumption by urban households.

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