Say Goodbye To Inflation And Hello To An Old Familiar Problem – The Average Joe

    Say Goodbye To Inflation And Hello To An Old Familiar Problem

    Victor Lei — Head of Research

    December 22, 2023

    December 22, 2023

    With 2024 around the corner, it may be time to close the book on inflation, toss it out the window and never look back. In November, the consumer price index (CPI) posted a 3.1% year-over-year (YoY) increase — half of what it was just a year ago and a far cry from its 9.1% peak in 2022. Expect it to fall even lower in 2024.

    The last domino: The Federal Reserve is making one last push to bring inflation back to its 2% target — and it’s hoping it can rely on one of the index’s most important (and pesky) components, shelter prices, which represents over 34% of the CPI. Despite a 6.5% YoY increase in shelter costs as of Nov. 2023, this figure may not reflect the full picture.

    • Delayed response: The decline in rents, observed in 55 cities according to Zumper’s 2023 Report, takes time to manifest in inflation numbers due to the typical 12-month duration of rent contracts.
    • Misleading metrics: UBS’ Chief Economist Paul Donovan raises concerns about the accuracy of owner equivalent rents, a component of the shelter CPI measurement. He suggests that this element might be artificially pushing up inflation, proposing that the true increase should be “less than 1%.”

    Your soft landing is out for delivery

    ING Economics expects that overall inflation will fall to the Fed’s 2% target by April — and with a still-robust economy, the Fed could soon declare that it has achieved a soft landing. That could mean quicker and steeper interest rate cuts next year, which would be welcome news for the economy.

    • According to the National Association of Realtors, lower interest rates could thaw the frozen homebuyers’ market — influenced by mortgage rates nearing 8% this year.
    • With interest rates as high as 9%, small businesses could go from survival mode to growth mode again as borrowing rates become more affordable.

    Not too high, not too low: Once inflation is finally defeated, the Fed might face the return of troublingly low inflation — which, believe it or not, had been a problem before the pandemic and can also signal economic stress or weakness. But this time, it could come with a twist. One economist predicts the onset of deflation (declining prices) as consumers push back against inflation created during the pandemic era.

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