What To Expect From Inflation For The Remainder Of 2023

The Fed is broadly satisfied with cooling inflation for the U.S. economy over recent months, but will it continue? As 2023 draws to a close, there are some risks to inflation’s trajectory, specifically housing, services and energy will, in combination, likely define inflation’s path.

Recent Trends

So far in 2023 inflation has generally moved lower. Headline Consumer Price Index inflation started the year running at an over 6% annual rate, and as of September is under 4%. Core CPI, which strips out food and energy prices, has also moved lower over the course of 2023, but at a slower rate.

Upcoming Inflation Data Releases

For the remainder of calendar 2023 we’ll see two more CPI releases, for the month of October, released on November 14 and, for the month November, released on December 12. Wholesale Producer Price Index data will be released a day later on November 15 and December 13 respectively. In addition, the Personal Consumption Expenditure Price Index, which is considered the Fed’s preferred inflation metric, will be released as part of the Personal Income and Outlays report later in the month on November 30 for October’s data and December 22 for November’s data.

Nowcasts

Latest nowcasts from the Cleveland Federal Reserve for October inflation suggest that headline inflation may cool further, in part, as the recent spike in certain energy prices drops back from September highs.

However, core inflation, with energy and food prices removed, may be broadly flat compared to September at 4.1%. That would be a mild concern for the Fed hoping for inflation returning to their 2% annual goal. The Fed has indicated that they would consider raising rates further if progress on inflation stalls. If nowcasts hold and inflation appears stuck at over 2%, then the Fed may contemplate an addition interest rate hike in December or January.

Housing Trends

Aside from volatility in energy prices, underlying trends in housing will shape the direction inflation takes over the coming months. That’s because housing, whether via a mortgage or rental costs, is a major expense for most households and inflation calculations reflect that. Housing carries a large weight in inflation indices.

The general pattern for 2023 has been shelter cost inflation rising at a slower pace as mortgage costs rise, but home prices have been trending upward since spring of 2023 in part due to reduced supply. This rebound in pricing may cause the trend of housing disinflation to reverse, at least temporarily, fueling inflation.

Most economists do expect rising mortgage costs to ultimately put pressure on home prices, but we haven’t really seen that, either in recent home price data or inflation figures just yet.

Wage Trends

Wage growth has eased in recent months. That should help cool prices for services. However, in absolute terms wage growth remains high. According to the Atlanta Fed’s Wage Growth Tracker, wage growth was over 5% for September 2023. That suggests services inflation may continue to ease, something the Fed is watching for. Though it’s unclear that wage growth running at 5% will enable overall inflation to drop to 2%.

The Main Question

It’s clear U.S. inflation is down materially from peak levels of 2021-2022 and that’s welcome news for the Fed and the broader U.S. economy. However, it’s unclear if inflation will return to the Fed’s 2% target in short order, or whether inflation may prove sticky at a level above that.

Some also argue that economic shocks could push inflation up further from current levels. 2023 will almost certainly be a year of cooling inflation in aggregate, but whether that trend continues as the year draws to a close is less certain and depends to some degree on trends in the housing market.

The Fed will be watching closely. If inflation does not continue to move closer to their 2% goal, then a further interest rate increase is possible, even though the Fed is expected to hold rates steady in November.