Inflation Is Down, but How Long Will That Last?

It looks as if inflation is cooling, numerous indicators show. But how enduring will that be? Pretty enduring for at least the next several years, according to a Natixis research paper by Jack Janasiewicz, a portfolio manager and strategist, and Garrett Melson, a portfolio strategist.

“Disinflation has been making steady progress as the breadth of those forces” increases, they wrote.

The Consumer Price Index print for October, 3.2%, was down from the previous month’s 3.7% and far down from the pandemic-era peak of 9.1% in June 2022. Natixis noted that monthly CPI boosts lately are near their pre-pandemic levels, meaning low. Month over month, the once-elevated core CPI (that is, minus volatile food and energy prices) has tumbled since the pandemic.

The Atlanta Fed’s Sticky ex-Shelter Consumer Price Index, which tracks prices that change less often than others, such as service costs, is at a low ebb. This is important because service costs jumped last year and have since settled down.

There has always been a gap between CPI (which measures what people say they buy) and the Fed’s favorite yardstick, the Personal Consumption Expenditures Index (which reflects what they actually buy), or PCE. The difference has narrowed radically from a year ago, meaning consumers are less freaked out by price hikes, which had caused them to believe their perceived outlays were more expensive than they really were.

Similarly, wholesale prices for used cars, an often-eyed barometer for consumer behavior, is way down. “Used car prices should see further deflation,” the Natixis report declared. Grocery bills, which leapt more than an annual 8% in early 2021, are mostly flat now. Ditto for energy bills: gasoline, heating oil and natural gas. Meanwhile, a Bloomberg economist survey found strong expectations that the CPI should approach 2% in early 2024.

Housing costs, which make up almost half of the core CPI, have been a stubbornly high component, mainly owing to reduced supply as builders cut back after the financial crisis of 2008 and 2009. The National Association of Home Builders expects this situation to ease, and so does Natixis.

“Shelter prices will drop—not if, but when,” the firm’s report stated. Wages have climbed, and that should make homes more affordable, Natixis opined. At the same time, the annualized rate of ascent for pay is slowing, from 8% a year ago to 5% now, which should prevent wages from fueling further inflation, per the Atlanta Fed.

The psychological effect of public inflation expectations is always powerful, and the Natixis study, citing a University of Michigan poll, showed that consumers largely expect prices to fall over the next five years.

What’s more, the inflation breakeven rate—the difference between the yield of an inflation-adjusted bond and a fixed-rate one with the same term—has tightened, to around two percentage points today from almost double that at the outset of 2022. The smaller recent figure indicates lower anticipated inflation, Natixis explained.

If Natixis is right, one economic worry for the general public should dissipate.