US Inflation Tracker

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The US Inflation Tracker captures the trends that provide context in today’s economy.

The Fed Is Done Hiking
Core goods remain in deflation, albeit at a more modest pace than what we’ve seen in recent months. Supercore services eased considerably following September’s spike, falling back to its pre-Covid trend.

It’s worth noting a subtle change in the language coming from the Federal Reserve, however. Supercore service inflation was a useful metric for much of the post-pandemic time frame. But that usefulness has become outdated. With the labor markets normalizing and rebalancing, the jobs backdrop has largely come back into equilibrium. With wage pressures abating, supercore service inflation has fallen out of the Fed’s messaging.

This puts the path of future disinflation largely on the shoulders of housing services, which represents nearly 42% of core CPI and 17% of core PCE. Just how important is housing now? Housing has been responsible for nearly 76% of the past 12 monthly core prints. Suffice to say – as goes housing, so goes core inflation. After the hot print in September that saw shelter costs rise at the fastest pace since May, shelter has resumed its steady, albeit choppy, path lower. And we all know the lagged methodology behind shelter costs – there remains plenty more disinflation in the pipeline that will manifest in prints in the year ahead.

Core Goods vs. Supercore Services: Consumer Price Inflation (12/31/16–10/31/23)
Source: Natixis Investment Managers Solutions, Bloomberg

Now It’s All About Rate Cuts
Sure the Fed will continue to talk tough, leaning on the higher-for-longer rhetoric. But keeping rates steady while inflation is falling acts as a passive tightening. Chair Powell has told us already that the Fed will stop hiking well before inflation returns to the 2% target and will also cut rates before then to ensure that they don’t overshoot and risk losing all the gains they’ve achieved on the labor side of their mandate.

Surgical cuts are coming to pull restrictive back to neutral and the market is rightly reflecting that with nearly 100 basis points of cuts priced into 2024. It’s no longer a question of if, but rather when. We’ve argued that the 1994-1995 environment provided a useful comparison for today. While not all conditions have been the same and the path has deviated at times, that playbook for policy rates is the model for this cycle. After tightening 300 basis points over a one-year period, the Greenspan Fed paused for a grand total of 5 months before easing 25 basis points as core PCE decelerated, even as core CPI accelerated and plateaued at 3%.

That pause lasted for another 5 months before the Fed cut 25bps at two consecutive meetings before holding rates steady for 14 months before a mid-cycle adjustment of 25bps in March of 1997. This held until the Russian financial crisis and LTCM prompted 75bps of cuts. Cuts can begin before inflation is fully back to target, via surgical cuts to adjust policy back to neutral, from which point the Fed can maintain flexibility for further mid-cycle adjustments in either direction as needed.

Implied Probability of Fed Rate Hikes (as of 11/16/23)

Source: Natixis Investment Managers Solutions, Bloomberg