While headline inflation is set to bounce in December on account of base effects, the core CPI is expected to record a ninth consecutive month of decelerating YoY growth.
I wouldn't say that deflation has definitely been avoided. Instead, the Fed delivered a necessary shift in its stance.
Current trends suggest that PCE inflation could be back to the Fed's 2% annual target within months, with disinflation continuing to deepen and spread. With the M2 money supply continuing to decline, there's also likely significant further disinflation in the pipeline (changes in M2 impact prices with a lag). I explain the current situation in greater detail here - https://www.economicsuncoveredresearch.com/p/latest-pce-data-supports-a-march-rate-cut
Once the stimulative impact of a draining RRP facility is extinguished, additional downward pressure is likely to flow through to M2 and economic growth, thus putting additional downward pressure on inflation.
It's certainly possible that the decline in M2 leads to a recession in 2024. Though with significant funds still in the Fed's (declining) RRP facility, this suggests that overall liquidity currently remains ample.
With a declining RRP facility also acting to stimulate the economy, I currently expect economic activity to remain relatively robust in 1Q24. Though once the RRP is fully drained, growth may downshift more significantly. This may begin to play out in earnest in 2H24.
Decidedly one of the most pertinent analyses in this space.
Delicious.
Thank you!
Excellent analysis thanks for keeping us informed. Gonna stay out of the way and wait for the market to react.
Is it going to be soft landing or stagflation? Jpow definitely avoided deflation with his recent dovish performance
I wouldn't say that deflation has definitely been avoided. Instead, the Fed delivered a necessary shift in its stance.
Current trends suggest that PCE inflation could be back to the Fed's 2% annual target within months, with disinflation continuing to deepen and spread. With the M2 money supply continuing to decline, there's also likely significant further disinflation in the pipeline (changes in M2 impact prices with a lag). I explain the current situation in greater detail here - https://www.economicsuncoveredresearch.com/p/latest-pce-data-supports-a-march-rate-cut
Once the stimulative impact of a draining RRP facility is extinguished, additional downward pressure is likely to flow through to M2 and economic growth, thus putting additional downward pressure on inflation.
Do you think that the decrease in M2 and growth will be substantial enough to tip us into a recession next year?
It's certainly possible that the decline in M2 leads to a recession in 2024. Though with significant funds still in the Fed's (declining) RRP facility, this suggests that overall liquidity currently remains ample.
With a declining RRP facility also acting to stimulate the economy, I currently expect economic activity to remain relatively robust in 1Q24. Though once the RRP is fully drained, growth may downshift more significantly. This may begin to play out in earnest in 2H24.
Interesting thank you for the insight