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Disinflation Slowing

March 20, 2024


Inflation has fallen fast from its peak in June 2022, but the last mile has proven more challenging. After January's inflation reading came in hotter-than-expected, February’s prints reaffirmed that prices remain sticky.


Headline consumer prices, as measured by the Consumer Price Index (CPI), increased from an annualized reading of 3.1% in January to 3.2% in February. After falling 6% over the one-year period ending in July 2023, headline inflation has ranged between 3% and 3.7%, with an average year-over-year growth rate of 3.3% since then. Meanwhile, core CPI, which excludes food and energy, declined from a year-over-year increase of 3.9% in January to 3.8% in February.


While some measures of inflation indicate that disinflation is slowing, the trend has reversed in other cases. For example, core inflation excluding shelter is up 0.3% since September to 2.2% year over year. Producer prices are up 1.1% year over year and near the highest in a year. And, although still negative, import prices came in at -0.8% from a year ago, the highest reading in over a year.


What are the implications of slowing disinflation? It suggests the Fed will remain patient in cutting rates, a view we have long held. We continue to believe the magnitude and timing of rate cuts will be less and later than what the market expects, which is now three rate cuts for 2024, down from six at the beginning of the year. Given the strength of the economy and stickiness of inflation, we expect rates will stay higher for longer, with two cuts in the later part of the year as the most likely path.  

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