January 17, 2024
The Federal Reserve (Fed) has made substantial progress in bringing down inflation. The Consumer Price Index (CPI) has fallen from its year-over-year peak of 9.1% in June 2022 to 3.4% in December.
Although headline inflation was a bit hotter than expected, core CPI, which excludes food and energy, fell from 4.0% to 3.9% from a year ago. While mostly in line with expectations, the pace of slowing has moderated with core CPI still well above the Fed’s 2% inflation target.
Much of the decline was due to a sharp drop in goods inflation, while services and housing prices have been stickier. Although shelter inflation is now 2% below its peak in 2023, it may take additional time to reach pre-pandemic levels, as history shows that shelter prices typically lag housing prices by 12-18 months. Excluding shelter, core inflation is nearing the Fed’s target at 2.2% year over year despite increasing each month since September.
We continue to believe inflation will moderate further in 2024, but as December’s report revealed, the last mile of disinflation may be the hardest. It will be important to monitor the potential impacts of recent attacks in the Red Sea. This includes supply chains as well as the price of oil, which was up 4% last week.
For these reasons, we think the federal funds futures market, which continues to expect more rate cuts than the Fed, is too optimistic. Due to this disconnect, the timing of the first cut could be a source of volatility. We believe the Fed’s fight against inflation is still unfinished, and it will likely wait for more evidence of persistent disinflation before pivoting to cuts.
This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. The Bank of New York Mellon, DIFC Branch (the “Authorised Firm”) is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: 240 Greenwich Street, New York, NY, 10286, USA. In the U.K. a number of the services associated with BNY Mellon Wealth Management’s Family Office Services– International are provided through The Bank of New York Mellon, London Branch, One Canada Square, London, E14 5AL. The London Branch is registered in England and Wales with FC No. 005522 and BR000818. Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, One Canada Square, London E14 5AL, which is registered in England No. 1118580 and is authorised and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd. This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors. This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2024 The Bank of New York Mellon Corporation. All rights reserved. WI-482370-2024-01-16