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Inflation: Unfinished Symphony

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. 




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