February 06, 2024
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.
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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