What To Expect From Inflation For The Remainder Of 2023
The Federal Reserve is broadly satisfied with cooling inflation for the U.S. economy over recent months, but will it continue? As 2023 draws to a close, there are some risks to inflation’s trajectory, specifically housing, services and energy will, in combination, likely define its path.
Recent Trends
So far in 2023 inflation has generally moved lower. Headline Consumer Price Index started the year running at an annual rate above 6%, and as of September, it is under 4%. Core CPI, which strips out food and energy prices, has also moved lower over the course of 2023, but at a slower rate.
Upcoming Inflation Data Releases
In the remainder of 2023 there are two more CPI releases. Data for October, released on November 14 and, numbers for November, will come out on December 12. Wholesale Producer Price Index data will be released a day later on November 15 and December 13, respectively. In addition, the Personal Consumption Expenditure Price Index, which is considered the Fed’s preferred inflation metric, will be released as part of the Personal Income and Outlays report later in the month — November 30 for October’s data and December 22 for November’s data.
Nowcasts
The latest nowcasts from the Cleveland Federal Reserve for October suggest headline inflation may cool further, in part, as the recent spike in certain energy prices drops back from September highs.
However, core inflation, with energy and food prices removed, may be broadly flat compared to September at 4.1%. That would be a mild concern for Fed policymakers hoping for inflation returning to their 2% annual goal. The Fed has indicated it would consider raising rates further if progress on inflation stalls. If nowcasts hold and inflation appears stuck at more than 2%, then the Fed may contemplate an additional interest rate hike in December or January.
Housing Trends
Aside from volatility in energy prices, underlying trends in housing will shape the direction inflation takes over the coming months. That’s because housing costs, whether via a mortgage or a rental, are is a major expense for most households and inflation calculations reflect that. Housing carries a large weight in inflation indices.
The general pattern for 2023 has been shelter cost inflation rising at a slower pace as mortgage costs increase. But home prices have been trending upward since spring of 2023, in part due to reduced supply. This rebound in pricing may cause the trend of housing disinflation to reverse, at least temporarily, fueling inflation.
Most economists do expect rising mortgage costs to ultimately put pressure on home prices. But that hasn’t really happened, either in recent home price data or inflation figures just yet.
Wage Trends
Wage growth has eased in recent months. That should help cool prices for services. However, in absolute terms, wage growth remains high. According to the Atlanta Fed’s Wage Growth Tracker, wage growth was more than 5% for September 2023. That suggests services inflation may continue to ease, which is something the Fed is watching for. Yet it’s unclear that wage growth running at 5% will enable overall inflation to drop to 2%.
The Main Question
It’s clear U.S. inflation is down materially from peak levels of 2021-2022 and that’s welcome news for the Fed and the broader U.S. economy. However, it’s unclear if inflation will return to the Fed’s 2% target in short order, or whether inflation may prove sticky at a level above that.
Some also argue that economic shocks could push inflation up further from current levels. This year will almost certainly be a period of cooling inflation in aggregate, but whether that trend continues as 2023 draws to a close is less certain and depends to some degree on trends in the housing market.
The Fed will be watching closely. If inflation does not continue to move closer to its 2% goal, then a further interest rate increase is possible, even though rates are expected to hold rates steady in November.