Economic Monitor – Weekly Commentary
by Eugenio Alemán

Inflation: From let’s party to party pooper!

February 16, 2024

Even at the risk of sounding like a parrot by repeating the same thing again and again, we think that it is, once again, appropriate at this time to do so: “One data point doesn’t a trend make.”

But it is clear that markets don’t care about trends, they live in the moment; if they see something they like or don’t like, they just react to it. This is what happened last Friday, when the Bureau of Labor Statistics (BLS) revised the seasonal factors for the Consumer Price Index for the whole of 2023, which showed that December month-on-month inflation was lower than what was originally reported – 0.2% versus an original release of 0.3%. Never mind that the year-over-year rate of inflation did not change at all. That is, even though the rate of inflation for December moved lower – from an originally reported 0.3% to 0.2% – every monthly seasonal factor during the year was revised so, overall, the effect of the revision for the year as a whole was non-existent, which should have been the message received by markets, not just the December revision.

This was not the first time that inflation numbers have pushed markets from euphoria to dismay and/or disappointment, and we should not dismiss more of these episodes coming our way during the next several months. The Federal Reserve (Fed) Chairman, Jerome Powell, clearly indicated that the Fed was not convinced inflation was guaranteed to continue its disinflationary process toward its 2.0% target. Although he said he was not concerned with an acceleration in inflation, he was concerned with the potential for inflation to remain above the Fed’s target. We wrote about this issue in last week’s Weekly Economics, using the Fed’s preferred Personal Consumption Expenditures (PCE) price index, which, by the way, has been reporting a 2%-handle rate of inflation for several months, unlike the Consumer Price Index (CPI).

But we also mentioned that housing prices within the PCE price index measure were also of great concern for the Fed even though housing prices have a much lower weight in the PCE price index compared to the CPI price index – about 15% versus 33%, respectively.

As many, including us, have argued in the past, housing prices' effects on both the CPI as well as the PCE calculation of inflation are different than other goods and services we buy often, such as gasoline, food, electricity, etc. Thus, people don’t feel the effects of housing prices often, and some, especially those who are homeowners and don’t move out of their homes, rarely experience them. Renters plus those that buy a new or existing home are the only ones being affected by higher housing prices. However, they only experience them when they move and/or renew their rent agreement or purchase agreement.

At the same time, housing prices typically affect these indices with very long lags. We had estimated that increases or decreases in home prices would start to seep into inflation indices with a lag of about 12 to 18 months. And we have already seen some slowdown in shelter prices within these indices over the last year or so. However, instead of further weakness lately, we have started to see shelter prices accelerating once again, which is bad news for the Fed and the prospects for achieving the 2% inflation target.

Perhaps one of the reasons for this renewed increase in shelter costs has to do with the fact that home prices started to increase more than six months or so ago for both new homes as well as for existing homes. This could be an issue going forward for the Fed.

Recall that the Fed needs to see monthly inflation increasing by about 0.15% per month on a sustained basis to achieve a 2.0% target, and that has not been the case (see the graph below). Thus, the Fed will remain unconvinced until it sees sustained downward movement in the rate of inflation, both monthly as well as year-over-year.

Updates to Our Forecast

We have updated our GDP forecast for the first quarter of 2024 on account of the strength in economic activity during the first quarter of the year. This update to our first quarter forecast will take economic growth for the whole of 2024 to 1.7% compared to our current, 1.3% estimated growth rate. For now, we are keeping our forecast for a very mild recession during the year as we remain concerned that high interest rates for longer will finally slow down economic activity and could pose a risk to economic growth during the next several quarters.


Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those Raymond James and are subject to change without notice the information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the U.S. Bureau of Labor Studies. Currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

The National Federation of Independent Business (NFIB) Small Business Optimism Index is a composite of ten seasonally adjusted components. It provides a indication of the health of small businesses in the U.S., which account of roughly 50% of the nation's private workforce.

The producer price index is a price index that measures the average changes in prices received by domestic producers for their output. Its importance is being undermined by the steady decline in manufactured goods as a share of spending.

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