In 2022, the highest inflation in 40 years will hit US consumers directly, prompting the US Fed to aggressively raise interest rates and unsettle investors. There may be more surprises in store for the inflation trajectory next year.
The US consumer price index (CPI), released on Wednesday, is expected to show inflation is easing, but growth is still expected to be about three times what it was before the pandemic. Market expectations for core CPI, which excludes food and energy, rose 0.3% month on month and 6.1% year on year. The CPI statistics for the same month will be the latest for the year.
Anita Markowska, chief financial economist at Jefferies, said she expects the November CPI to reinforce the view that inflation has peaked. But “in terms of the inflation outlook, there are still some pitfalls that could still bog down at least in the coming months.”
Bad track record
Economists have underestimated US inflation in five of the past seven months
Source: Bureau of Labor Statistics, Bloomberg
The trajectory of inflation next year will likely depend on whether increases in commodity prices taper off further, when and by how much rents fall, and how moderate wage growth is, especially in the services sector.
PCI of November
Prices of used cars and medical services are expected to decline in the November CPI, while housing costs will continue to be a major inflationary driver. Rents slowed in the October CPI reading, but TD Securities’ Oscar Muñoz expects a small rebound in November. Economists see housing-related items as a wildcard in the November CPI.
Munoz also expects apparel prices to decline for the third consecutive month, following significant price cuts for the holiday season. Gasoline prices, which have continued to fall since early November, should put downward pressure on overall CPI in the same month.
Future perspective
Imbalances in the supply and demand for goods have so far been the main driver of inflation, but improving supply chain conditions and weakening both domestic and foreign demand have helped to calm prices.
The biggest drivers of US inflation so far this year
Inflation has risen 7.7% so far this year, driven mainly by food and energy, although many major items have strengthened
Source: Bureau of Labor Statistics, Bloomberg
Omar Sharif, founder of research firm Inflation Insights, said articles related to housing will matter in the future, and he’s watching when and how fast they decline. We also expect prices for basic services to slow at a faster rate than many expected. “We’ve been blindsided by a lot of upside surprises this year,” he said, but next year, “if there are any major surprises, they should be downside.”
Slide down
Economists expect inflation to cool significantly over the next year
Source: Bloomberg November Survey of Economists, Bureau of Labor Statistics
BNP Paribas chief economist Carl Ricadona expects the CPI to fall to 4% by mid-next year from around 8% today. But “halving it back from 4% to 2% is a no-brainer,” he said in a webinar earlier this month.
Whether inflation returns to the Fed’s target will ultimately depend on how prices move in basic services, excluding housing. Because wages matter in these industries, economists will be taking a close look at a number of wage indicators. The labor market is showing some weakness, but overall it is still very strong.
“I think what inflation is going to be in the next six months or a year really depends on wages,” Jefferies’ Markowska said.
news-rsf-original-reference paywall">Original title:What to expect in the latest CPI report for 2022 and the year ahead(extract)
