The pace of improvement in the U.S. inflation rate is set to slow in the coming year.
According to the economists surveyed by Bloomberg in its latest monthly outing, the core personal consumption expenditures (PCE) price index-—-the Federal Reserve’s preferred measure of inflation–will still be running at a 2.5% pace at the end of 2024. That’s up slightly from the 2.4% prediction in last month’s Bloomberg poll.
Importantly it’s still significantly higher than the Fed’s 2% target inflation rate. The U.S. central bank is currently grappling with a decision on whether to continue to hold interest rates steady or to begin cutting rates. What to do if the economists are right and inflation will still be above target by the end of 2024. Keep rates steady and hope that the impact of higher interest rates is still working its way through the economy and will eventually bring inflation down to 2%? That wouldn’t be very popular with Wall Street, which has priced in 100 basis points of interest rate cuts in 2024. Or just declare victory and after a pause in rate increases for the sake of appearance and credibility, begin to cut rates and give the financial markets what they want.
The core PCE, which excludes volatile food and energy costs, peaked at a 5.57% annual pace in February last year, and probably hit 3.5% in October. The October PCE report is due on Thursday.
The projection of slowing progress on inflation isn’t terribly surprising. This is the way it usually works-—inflation is slower to get back to normal after an initial stage of rapid improvement, Deutsche Bank wrote in a note Monday.
“It is difficult to make general statements like the the last mile of disinflation will be more difficult. However, it does seem that the last mile is likely to take longer,” the bank said said. “The current disinflation towards target is likely to fit in with the other historical episodes with the last leg taking somewhat longer than the first.”
“Given inflation remains still high and will decline just gradually, the Fed will wait to cut rates until mid-2024 and the easing of policy will be gradual,” Kathy Bostjancic, chief economist at Nationwide Life Insurance, told Bloomberg.
