12/30/2022

Inflation continues to cool!

“Inflation” is the most important keyword for the U.S. economy in 2022.

 

The Consumer Price Index (CPI) has soared in the first half of this year, with prices rising across the board, from gasoline to meat, eggs, and milk and other staples.

In the second half of the year, as the U.S. Federal Reserve continued to raise interest rates and problems in the global supply chain gradually improved, the increase CPI month-on-month gradually slowed down, but the year-on-year increase is still obvious, especially the core rate CPI remains high, which makes people worry that inflation may remain high levels for a long time.

However, the recent inflation seems to have heralded a lot of “good news”, the CPI declined path becomes clearer and clearer.

 

Following much slower-than-expected CPI growth in November and the lowest growth rate of the year, the Fed’s most favored inflation indicator, the core personal consumption expenditures (PCE) index excluding food and energy, slowed for the second month in a row.

In addition, the University of Michigan survey’s of consumer inflation expectations for the coming year fell beyond expectations to a new low since last June.

As you can see, the latest data shows that inflation in the U.S. has indeed declined, but will this signal last and how will inflation behave in 2023?

 

The Great Inflation 2022 Summary

So far this year, the United States has experienced the kind of hyperinflation that occurs only once every four decades, and the magnitude and duration of this major inflation are historically rate.

(a) Despite the Fed’s relentlessly strong rate hikes, inflation continues to exceed market expectations – CPI reached a high of 9.1% year-over-year in June and has been slow to decline.

Core inflation CPI climbed as high as 6.6% in September before falling slightly to 6.0% in November, still well above the Federal Reserve’s 2% inflation target.

Review the causes of the current hyperinflation, which are mainly due to a combination of strong demand and supply shortages.

On the one hand, the government’s extraordinary monetary stimulus policies since the epidemic have fueled robust consumer demand by the public.

On the other hand, post-pandemic labor and supply shortages and the impact of geopolitical conflicts have led to a surge in the prices of goods and services, which has been exacerbated by  the gradual tightening of supply.

Deconstruction of CPI subsections: energy, rents, wages “three fires” of the succession of rising together to the inflationary fever does not subside.

 

In the first half of the year, it was mainly the price increases in energy and commodities that drove overall inflation CPI, while in the second half of the year, inflation in services such as rents and wages dominated the upward movement of inflation.

 

2023 Three main reasons will push back inflation

At present, all indications are that inflation has peaked, and the factors driving up inflation in 2022 will gradually weaken, and CPI will generally show a downward trend in 2023.

First, the growth rate of consumer spending (PCE) will continue to slow.

Personal consumption expenditures on goods have now fallen month-on-month for two quarters in a row, which will be the main factor driving a future decline in inflation.

Against the backdrop of rising borrowing costs as a result of the Fed’s interest rate hike, there could also be a further decline in personal consumption.

 

Secondly, the supply gradually recovered.

Data from the New York Fed show that the Global Supply Chain Stress Index has continued to fall since its all-time high in 2021, pointing to a further decline in commodity prices.

Third, the rent increases initiated a turning point.

Successive sharp rate hikes by the Federal Reserve in 2022 caused mortgage rates to jump and home prices to fall, which also pushed rents down, with the rent index now down for several months in a row.

Historically, rents typically trend about six months earlier than residential rents in the CPI, so a further decline in headline inflation will follow, led by a decline in rents.

Based on the above factors, the annual rate of inflation growth is expected to decline more rapidly in the first half of next year.

According to the forecast of Goldman Sachs, CPI will fall slightly to below 6% in the first quarter and accelerate in the second and third quarters.

 

And by the end of 2023, the CPI will probably fall below 3%.

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