Inflation is on a downward trend, but the question is whether and when it will come down to the FED’s 2% target.

With so many moving parts – the future of inflation can be uncertain.

What we do know…

  • Inflation has been the underlying issue that caused the FED, and central banks globally, to act in such an aggressive manner.
  • Inflation peaked in June 2022 and has been trending lower since.
  • Headline inflation for March moderated and came in at 5% year-over-year (YoY) versus 6% for February.
  • Headline CPI tends to track the ISM Service Prices Index with a 3-month lag.
  • The ISM Service Price Index peaked in April 2022 and has fallen precipitously since, now approaching 2% on a YoY basis.
  • Core CPI tracks the ISM Service Price Index with a 6-month lag, so we expect Core CPI to follow the ISM Service Price Index lower in the coming months.
  • Wage inflation is coming down. Average Hourly Earnings also broadly follow ISM Service Price Index, although with more volatility, with a 3-month lag, suggesting wage inflation should also fall in the months ahead, taking pressure off overall inflation generally.
  • Inflation expectations, a metric watched closely by the FED, are falling rapidly.
  • The Federal Reserve Bank of New York Survey of Consumer expectations show the median one-year ahead expected inflation at 4% and the three-year ahead expected inflation at 2.5%, both measures are significantly lower than they were a year ago.

If the inflation picture improves, that should take some pressure off  the FED and allow them to pause their rate hikes and begin to cut rates, most likely starting in 2024, back to the neutral rate of around 2.5%.