Inflation goes to surprise investors again in 2023

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Thursday, January 12, 2023

Today’s newsletter is by Myles Udland, Head of News at Yahoo Finance. Follow him on Twitter @MylesUdland and on LinkedIn. Read this and more market news on the go along with Yahoo Finance App.

The ultimate consumer price index of 2022 is due out Thursday morning, and is anticipated to indicate prices rose 6.5% over the prior 12 months in December.

As 2022 began, the inflation conversation was centered on whether an increase in prices would prove to be “transitory.”

The reply was definitive: Inflation was not transitory.

In order 2023 begins, conversations now give attention to how entrenched inflation pressures have turn into and the way far the Federal Reserve may have to go to chop them off.

Take comments from JPMorgan (JPM) CEO Jamie Dimon, for example, who said in an interview this week the Fed “may thoroughly” raise rates of interest to six% in an effort to bring inflation “to where it must be.”

The newest Fed forecasts suggest rates will top out at 5.1% this 12 months.

JPMorgan Chase and Company President and CEO Jamie Dimon testifies before a Senate Banking, Housing, and Urban Affairs hearing on “Annual Oversight of the Nation’s Largest Banks”, on Capitol Hill in Washington, U.S., September 22, 2022. REUTERS/Evelyn Hockstein

And just as inflation offered investors persistent surprises in 2022, it is ready to do the identical in the brand new 12 months. Only this time, the surprises shall be in the wrong way.

In a note to clients published earlier this week, Ian Shepherdson at Pantheon Macroeconomics explored a matter he’s gotten from clients recently: Is inflation going to eventually be negative this 12 months?

In Shepherdson’s view, the trail to getting headline inflation as measured by the CPI from 6.5% to below 0% is unlikely.

However the economist does see the Fed’s expectations for price changes being incorrect again this 12 months, except this time the central bank shall be too pessimistic about how much price increases slow.

A drop in rents and margins should bring core inflation growth to a monthly rate of 0.2% by the center of the 12 months. Meanwhile, absent one other spike in oil prices, gasoline prices could possibly be some 30% lower than the prior 12 months come early summer, Shepherdson notes.

Furthermore, food prices, which rose 12% over last 12 months in November, should moderate significantly as food commodity prices drop, with price increases for food at home approaching 0% by the top of 2023.

Inflation pressures are expected to moderate notably throughout 2023, though this slowdown in price increases bringing headline inflation below 0% is still not likely. (Source: Pantheon Macroeconomics) — Inflation pressures are expected to moderate notably throughout 2023, though this slowdown in price increases bringing headline inflation below 0% remains to be not going. (Source: Pantheon Macroeconomics)

“We now have no problem making our base case that inflation undershoots the trail implied by the Fed’s forecasts, but a dip below zero is a protracted shot,” Shepherdson wrote. “It is not not possible, nevertheless it is a distraction from the larger point, which is that the Fed can have to acknowledge that inflation pressure is fading faster than they expect, no matter whether the ultimate destination is 2%, zero, or -2%.”

In 2022, nearly anyone who said the Federal Reserve could be incorrect on inflation turned out to be right: Inflation rose on the fastest pace in 40 years and the central bank was playing catch-up all the way in which.

And if Shepherdson’s view seems to be right this 12 months, the central bank shall be scrambling once more.

But this time in the wrong way.

“Chair Powell has made it abundantly clear that the Fed won’t be front-running the approaching drop in inflation,” Shepherdson wrote, “but neither will they have the ability to disregard it once it becomes clear to markets that the downshift is real.”

What to Watch Today

Economy

8:30 a.m. ET: Consumer Price Index, month-over-month, December (0% expected, 0.1% during prior month)
8:30 a.m. ET: CPI Excluding Food and Energy, month-over-month, December (0.3% expected, 0.2% during prior month)
8:30 a.m. ET: Consumer Price Index, year-over-year, December (6.5% expected, 7.1% during prior month)
8:30 a.m. ET: CPI Excluding Food and Energy, year-over-year, December (5.7% expected, 6.0% during prior month)
8:30 a.m. ET: Real Average Hourly Earnings, year-over-year, December (-1.9% during prior month, revised to -2.1%)
8:30 a.m. ET: Real Average Weekly Earnings, year-over-year, December (-3.0% during prior month, downwardly revised to -3.3%)
8:30 a.m. ET: Initial Jobless Claims, week ended Jan. 7 (214,000 expected, 204,000 during prior week)
8:30 a.m. ET: Continuing Claims, week ended Dec. 31 (1.694 million during prior week)
2:00 p.m. ET: Monthly Budget Statement (-$60 billion expected, -$21.3 billion during prior month)