by Calculated Risk on 1/08/2024 02:50:00 PM

Earlier I posted some questions on my blog for next year: Ten Economic Questions for 2024. Some of these questions concern real estate (inventory, house prices, housing starts, new home sales), and I’ll post thoughts on those in the newsletter (others like GDP and employment will be on this blog).

I'm adding some thoughts, and maybe some predictions for each question.

5) Inflation: Core PCE was up 3.2% YoY through November. This was down from a peak of 5.6% in early 2022.  The FOMC is forecasting the YoY change in core PCE will be in the 2.4% to 2.7% range in Q4 2024. Will the core inflation rate decrease further in 2024, and what will the YoY core inflation rate be in December 2024?

Although there are different measures for inflation, they all show inflation above the Fed's 2% inflation target on a year-over-year basis.

Note:  I follow several measures of inflation, including median CPI and trimmed-mean CPI from the Cleveland Fed.  Also core PCE prices (monthly from the BEA) and core CPI (from the BLS).

Click on graph for larger image.

This graph shows the year-over-year change for four key measures of inflation.  

On a year-over-year basis, the median CPI rose 5.2% (down from 5.3% in October), the trimmed-mean CPI rose 4.0% (down from 4.1%), and the CPI less food and energy rose 4.0% (unchanged from 4.0%).  Core PCE was up 3.2% YoY, down from 3.5% in October.

The Fed is projecting core PCE inflation will decrease to 2.4% to 2.7% by Q4 2024. 

However, over the last 6 months, inflation has already slowed to the Fed's target (annualized):

PCE Price Index: 2.0% 
Core PCE Prices: 1.9%

Also, the sharp slowdown in household formation is impacting the cost of shelter. The surge in household formation during the pandemic was unrelated to monetary policy (it was mostly due to work-from-home). And the more recent slowdown in household formation is also unrelated to monetary policy.  If we look at core PCE minus Housing, this has only increased at a 1.1% annualized rate over the last 6 months.

Pandemic economics are weird.   We saw a shift from services to goods early in the pandemic, a surge in household formation related to work-from-home pushing up rents, then a shift from goods to services and a sharp slowdown in household formation.  Most of these distortions are behind us.

My guess is core PCE inflation (year-over-year) will decrease in 2024 (from the current 3.2%), and I think core PCE inflation will be close to the Fed's target by Q4 2024.  There might even be concern later this year that inflation will fall below target.

Here are the Ten Economic Questions for 2024 and a few predictions:

• Question #1 for 2024: How much will the economy grow in 2024? Will there be a recession in 2024?
• Question #2 for 2024: How much will job growth slow in 2024? Or will the economy lose jobs?
• Question #3 for 2024: What will the unemployment rate be in December 2024?
• Question #4 for 2024: What will the participation rate be in December 2024?
• Question #5 for 2024: What will the YoY core inflation rate be in December 2024?
• Question #6 for 2024: What will the Fed Funds rate be in December 2024?
• Question #7 for 2024: How much will wages increase in 2024?
• Question #8 for 2024: How much will Residential investment change in 2024? How about housing starts and new home sales in 2024?
• Question #9 for 2024: What will happen with house prices in 2024?
• Question #10 for 2024: Will inventory increase further in 2024?