TMV - Updating Our U.S. Inflation Projections

Summary

• Inflation is on a downward trajectory but will take time to return to target.
• Last week’s U.S. Consumer Price Index reading was in line with consensus expectations for January, with headline CPI increasing 0.5% month-over-month and 6.4% year-over-year.
• With the January CPI report in hand, coupled with the dynamics described above, we have not materially changed our longer-term inflation forecasts.

By Joseph Purtell

Inflation is on a downward trajectory but will take time to return to target.

Last week’s U.S. Consumer Price Index ((CPI)) reading was in line with consensus expectations for January, with headline CPI increasing 0.5% month-over-month (MoM) and 6.4% year-over-year (YoY). Core inflation rose 0.4% MoM and 5.6% YoY. In the non-core categories, the headline number was boosted by both food and energy, which rose 0.5% and 2.0% MoM, respectively. Within the core components, goods were up by a modest 0.07% MoM while services increased by 0.55% MoM.

While printing near forecaster expectations, the January CPI report represents an upward drift relative to the Q4 2022 pace (which itself was restated slightly higher than its originally published number with the updated seasonal factors). As we laid out in previous analysis after the release of December CPI, we judged that the Q4 rate of inflation was understating the actual underlying trend, largely because of core goods deflation. We did not expect this to persist into 2023, and indeed the January CPI report showed a return of core goods to low-yet-positive levels of inflation, a place where we expect them to remain, on average, for the rest of the year. Additionally, while we expect a moderation in core services in 2023—mainly a deceleration in shelter inflation to more normal levels—we project that this will not begin in earnest until the second quarter and into year-end. We expect that the elevated level of inflation in January will roughly remain throughout the first quarter before a more sustainable, yet slow, downtrend takes hold.

With the January CPI report in hand, coupled with the dynamics described above, we have not materially changed our longer-term inflation forecasts. We continue to expect inflation to remain well above the Fed’s 2% target by year-end 2023 at 3.2% and 3.5% on headline and core, respectively, while by year-end 2024 inflation should be near 2%.

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