Macro charts, could inflation surprise again?

2:56 pm 24 November 2023

In recent weeks, the market's attention was focused on stabilizing prices and the end of interest rate hikes. Wall Street, after a deeper correction in early October, has now shifted to almost euphoric increases, with indexes just a few percent off their historical highs. This positive sentiment is supported by a stabilizing U.S. job market and declining inflation. Adding to this a rebounding industrial sector, markets currently perceive it as the perfect recipe to avoid recession while bringing inflation to target. However, are the data really that optimistic, and is the risk of inflation rebounding decreasing? Let’s examine some charts on U.S. inflation for more details.

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Although the job market has begun to stabilize, wages remain high, though not as high as at the turn of 2021-2022. Inflation is falling, and so far, the progress is noticeable.

The inflation issue in Western economies largely arose from the central banks' decisions during the COVID pandemic. However, as quickly as inflation appeared, it now seems to be rapidly subsiding. The only apparent obstacle to further slowing price growth seems to be a strong supply shock, such as an increase in oil prices due to escalated conflict in the Middle East. Currently, the chances of such a pivot are small, and markets are not concerned about this scenario.

High inflation readings are primarily driven by high housing rental prices. Many factors support the normalization of inflation in recent months, such as the slowdown in the growth of energy components, food prices, and, most importantly, the upcoming decline in shelter.

The Shiller Home Price Index indicates an impending decline in the growth of rental prices – currently the main component of inflation.

Assuming constant month-to-month changes, inflation should gradually head towards 2.0-2.5% by the end of 2024/2025. It’s important to note that we may see a slight inflation rise due to the base effect at the beginning of 2024. However, if month-to-month changes maintain the average of the last 10 years, around 0.23% (or less, excluding the inflation increase period from 2021), we should remain on a downward trend (light green path).

The data suggest that the U.S. economy is currently heading in the right direction. Although the Fed maintains hawkish bias, inflation should gradually ease. However, it’s important to remember that we are still in an environment of high interest rates, and their impact on the economy may be evident in 2024. Until now, the U.S. economy has remained relatively resilient thanks to the financial cushion maintained after the 2020-2021 money printing and the low cost of debt during that period.

The content of this report has been created by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, (KRS number 0000217580) and supervised by Polish Supervision Authority ( No. DDM-M-4021-57-1/2005). This material is a marketing communication within the meaning of Art. 24 (3) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II). Marketing communication is not an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC and Commission Delegated Regulation (EU) 2016/958 of 9 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest or any other advice, including in the area of investment advisory, within the meaning of the Trading in Financial Instruments Act of 29 July 2005 (i.e. Journal of Laws 2019, item 875, as amended). The marketing communication is prepared with the highest diligence, objectivity, presents the facts known to the author on the date of preparation and is devoid of any evaluation elements. The marketing communication is prepared without considering the client’s needs, his individual financial situation and does not present any investment strategy in any way. The marketing communication does not constitute an offer of sale, offering, subscription, invitation to purchase, advertisement or promotion of any financial instruments. XTB S.A. is not liable for any client’s actions or omissions, in particular for the acquisition or disposal of financial instruments, undertaken on the basis of the information contained in this marketing communication. In the event that the marketing communication contains any information about any results regarding the financial instruments indicated therein, these do not constitute any guarantee or forecast regarding the future results.

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