July 25, 2023
Recent data point to slowing inflation. While there are many ways to look at inflation, we like to look at the US Core Consumer Price Index (Core CPI) broken down into core goods, core services ex housing, and housing. The chart below shows the contribution of each category to core inflation. Earlier this year, the contribution from core goods started to fall as supply chains reverted to more normal levels and companies dealt with rising inventory levels. We believe this trend is likely to continue and that eventually expect core goods prices to decline (deflation).
More recently, we have seen a gradual slowing in core services inflation. We break this up between housing and ex housing given the importance of housing in the inflation metrics. Housing inflation has clearly peaked, in our view, and real-time indicators for housing prices and rents point to further deceleration in the housing portion of the Core CPI. Inflation for core services ex housing has also been decelerating but needs to be watched carefully. This component tends to be stickier than other areas of inflation and can be heavily influenced by wages given the higher share of costs ascribed to labor. Recently, the slowdown has come from a few select categories, including travel-related sectors, so we will be watching to see if the slowdown broadens out for core services ex housing inflation. Overall, these trends fit with our view that inflation will decelerate over the remainder of the year. If we are correct in our recession call, we would expect inflation to stay muted in 2024 as well.
US Core Consumer Price Index (Core CPI)
Year-over-year % change
Sources: Macquarie, Macrobond, and US Bureau of Labor Statistics (BLS).
Chart is for illustrative purposes only.
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