Inflation Outlook: Continuing to Cool Down or Picking Back Up Again?


  • The overall inflation outlook may look more murky after two strong CPI prints.
  • Overall inflation came in hotter than expected on a month-over-month basis.
  • That said, cooling housing inflation data should bring the inflation target closer to the Fed’s 2% goal.
inflation outlook - Inflation Outlook: Continuing to Cool Down or Picking Back Up Again?

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This year could mark a turn of events for inflation, despite overall CPI ticking higher in recent months. Inflation experienced a 3.4% rise in December 2023, and January’s overall CPI data showed a month-over-month increase of 0.3%, hotter than where economists and the market were expecting.

While grocery prices stabilized, some non-food and energy goods may stay flat or decrease. Service inflation remains high, though housing and some services could improve due to slower rent and wage growth. Additionally, shelter and healthcare costs are persistently high, with car insurance premiums increasing rapidly.

Despite a projected decline in headline inflation, the Federal Reserve seeks moderation in services prices to justify interest rate cuts. Wage increases need to soften to avoid further price hikes. Potential rate cuts may occur in May or June, preceded by a portfolio runoff slowdown in March if inflation shows improvement.

Here’s everything you need to know for 2024’s economic and inflation outlook.

World Economic Outlook for 2024

The IMF staff releases a biannual survey analyzing global economic trends. This report covers various financial aspects, offering both overview and detailed analyses. Analysts predict that global growth is expected to rise this year and in 2025, with a 3.1% and 3.2% increase, respectively. 

However, that growth rate remains below the historical average. Inflation is decreasing faster than anticipated, influenced by supply-side adjustments and tight monetary policies. Predictions show a decline in global headline inflation to 5.8% in 2024 and 4.4% in 2025, with the latter revised downwards.

Disinflation and steady growth lessen hard-landing risks, balancing global growth risks. Faster disinflation could ease financial conditions, while excessive fiscal policy might boost short-term growth at later adjustment risk. 

Structural reforms could enhance productivity with cross-border benefits. Conversely, commodity spikes or persistent inflation could tighten monetary policy. China’s property issues or disruptive fiscal policies could hinder growth.

Policymakers must manage inflation’s descent, adjusting monetary policy accordingly. Fiscal consolidation is necessary for future shocks, revenue generation and debt control. Structural reforms bolster productivity and debt sustainability. Additionally, multilateral coordination is crucial for debt resolution and climate change mitigation.

Inflation Will Likely Decline in 2024

Inflation is expected to normalize without a recession. Following a peak in 2022, inflation sharply declined in 2023. Projected inflation for 2024 aligns with the Federal Reserve’s 2% target, which is attributed to supply chain resolutions and Fed tightening.

Projected inflation averages 1.8% from 2024 to 2028, slightly below the Fed’s 2.0% target. If inflation persists, the Fed may induce a recession. However, a soft landing is expected, with inflation returning to normal despite minor GDP growth deceleration.

The PCE Index, preferred by us and the Fed, dropped from 7.1% in June 2022 to 2.6% by December 2023. CPI inflation, with methodological differences, fell more sharply to 3.4% in December 2023. Core inflation, excluding volatile items, gradually decreased. Core PCE was 2.9% and core CPI 3.9% in December 2023.

Post-pandemic inflation surged initially in a few spending categories, with excess inflation at 5.7% in Q1 2022. Durable goods, energy and food at home drove 70% of this excess inflation despite constituting only 20% of total consumption. Inflation has since spread to other categories like housing and vehicles, accounting for about half of excess inflation. Partial deflation in these areas has significantly mitigated overall inflation, a one-time catch-up effect.

Due to industry-specific supply shocks driving high inflation, a bottom-up approach is taken to forecast inflation for the next five years. Significant supply constraints are easing in durables, alongside adjustments in food and energy industries due to disruptions like the Ukraine war. Housing inflation may subside without rent growth acceleration. 

Moderate wage growth and minimal supply disruptions will likely restrain inflation, with deflationary pressures due to suboptimal economic growth through 2024.

Housing Market in 2024

Price indexes reflect living costs, yet changes in housing prices take time to manifest due to infrequent transactions. CPI inflation remains high due to accumulated rent increases since 2021. Market rents are sharply decelerating due to declining demand and increased apartment supply. 

Consequently, CPI shelter inflation is expected to slow until housing inflation normalizes. Home prices are anticipated to decline further, returning to pre-pandemic levels, enhancing housing affordability and reducing construction costs.

In 2022, rates nearly doubled due to the Federal Reserve’s anti-inflation measures, remaining high since. While not directly setting mortgage rates, the Fed’s actions influence lenders. Homebuyers may still feel pressure despite hints of rate cuts, with predictions of gradual rate decline as inflation eases, but not below 6% until late 2024.

In 2023, home prices remained stable, but sales volume declined, with existing home sales dropping for five consecutive months before a slight uptick in November. However, according to National Association of Realtors (NAR) data, December saw another decrease to an annual pace of 3.78 million, down 6.2% year-over-year. Trends may shift in 2024 with declining mortgage rates, potentially boosting sales. 

The NAR forecasts a 13% sales increase, while Redfin’s (NASDAQ:RDFN) Chen Zhao expects moderate growth due to rates likely staying above 6%. CoreLogic’s Selma Hepp anticipates increased sales activity driven by lower rates, encouraging more sellers to list homes and replenish inventory.

Housing prices soared to historic highs, nearing the record set in June 2022. Despite this, a drop in prices is unlikely in 2024, according to Yun, due to improved supply. NAR predicts a modest rise in median prices, with Zhao highlighting the connection between prices and inventory. While inventory may increase slightly, prices will unlikely decline unless demand weakens.

Bottom Line

The Federal Reserve aims for long-term inflation to reach 2%. Anticipating a gradual easing of monetary policy before inflation hits 2%, the timing and pace hinge on various factors, including monthly inflation, labor market data and financial conditions. Fed Chair Jerome Powell highlighted the need for sustained progress toward the 2% target, cautioning against premature talks of interest rate cuts.

Powell suggested caution about prematurely assessing policy effectiveness or speculating on rate cuts. Economist Bill Adams believes Powell’s stance reflects the Fed’s intent to ensure inflation is well-managed before considering rate reductions. Comerica projects the Fed to maintain the federal funds target rate at 5.25% to 5.5% until mid-2024, with at least one potential quarter-point cut upcoming.

The outlook suggests a return to average inflation in 2024 amid positive real GDP growth, marking a soft landing. Despite predictions, inflation fell significantly while GDP growth accelerated, thanks to eased supply constraints. Economic resilience amidst Fed rate hikes raises the likelihood of overheating, with growth remaining robust and inflation between 3% and 4%. 

Anticipated moderation in GDP growth and inflation to 2% is expected with ongoing rate hikes, avoiding a recession but impacting borrowers transitioning to higher rates.

On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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