Medium-Term US Inflation Update: Broadening disinflation to pave the way for a significant rate cutting cycle
With the US CPI expected to see material 2H24 disinflation, a significant rate cutting cycle is forecast to begin in September — I expect three rate cuts in 2024 and many more to come in 2025.
My latest medium-term US CPI update has been produced as a PDF report, which can be accessed by premium subscribers via a download link at the bottom of this post.
Shown below is the front-page of the 26-page report, entitled “Broadening disinflation to pave the way for a significant rate cutting cycle”.
The 26-page report includes 72 different charts and tables and covers:
the inflation related implications of the economic backdrop and outlook;
my medium-term MoM and YoY forecasts across the headline CPI, core CPI, headline CPI ex-shelter and core CPI ex-shelter;
the outlook for the headline, core and supercore PCE Price Index based on my latest medium-term CPI forecasts;
the implications for Fed policy;
the implications for financial markets; and
the underlying details of my medium-term CPI forecast across the durables, nondurables and services categories.
Monetary policy backdrop remains conducive to lower inflation
While the federal government’s large net T-bill issuance and the associated draining of the Fed’s RRP facility has acted to somewhat offset Fed tightening, with the Fed’s significant interest rate hikes drastically lowering commercial bank loan & lease growth (from 12.2% YoY in October 2022 to 2.6% YoY in June) and the Fed’s QT acting to place downward pressure on the M2 money supply (M2), M2 growth was a low 0.64% YoY in June. While 3- and 6-month annualised trends show an uptick in M2 growth, it remains relatively modest and conducive to further disinflation.
CPI growth expected to disinflate significantly in 2H24
Led by an expected material decline in the CPI’s rent based measures, I now forecast the core CPI to record YoY growth of 2.4% in December (vs my April medium-term forecast of 2.7%). While subject to more volatile energy prices, I currently expect the headline CPI to moderate to 2.3% YoY in December (vs my April medium-term forecast of 2.5%).
Current forecasts suggest material downside to the Fed’s projections
For 4Q24, the Fed’s median projection is for headline/core PCE Price Index (PCEPI) growth of 2.6%/2.8% YoY. This compares to my 4Q24 headline/core CPI forecast of 2.4%/2.7% YoY. Assuming that PCEPI growth returns to its historical average divergence to the CPI, this points to 4Q24 headline/core PCEPI growth of 2.0%/2.3% YoY (see page 11 for further detail).
Three 2H24 interest rate cuts expected with many more likely on the way
After titling my 26 April Medium-Term US CPI Update “Don’t rule out multiple rate cuts just yet”, two consecutive months of modest core CPI growth and a material increase in the unemployment rate has seen market expectations for multiple 2H24 rate cuts rise to 93.5%, from 40.3% on 26 April. I continue to expect that the Fed will deliver an initial 25bp interest rate cut at its September meeting. Following June’s US CPI report, I subtly shifted my expectation from “multiple” 2H24 rate cuts, to three. Following this update to my medium-term CPI forecasts, I continue to expect three 2H24 rate cuts. With M2 growth anticipated to remain relatively modest, which is expected to support further disinflation in 1H25, I expect many more rate cuts in 2025, with a September cut expected to kick off a significant rate cutting cycle.
The full 26-page report is available to download at the link below: