Sticky Inflation

Good morning: So far this year, the last mile of disinflation has proven to be the hardest. Consumer Price Index (CPI) inflation has been accelerating, Core Personal Consumption Expenditures Price Index (PCE) inflation surprisingly rose in 1Q24, and the Employment Cost Index (ECI) climbed a stronger-than-expected 1.2%—its largest gain in a year. Sticky price pressures pose a challenge for the data-dependent Fed. Fortunately, a look across the drivers of inflation offer several reasons why a significant reacceleration of inflation is unlikely: 

· Wages may be sticky, but a labor market cooldown is underway. 

· Consumers are more price sensitive now. The inflation surge of 2022 was driven by supply bottlenecks combined with pent-up consumer demand, whereas the consumer today is much more quiescent. There is heightened price sensitivity among consumers leading to trade-downs and weakness in discretionary spending. The consumer remains resilient, but it is not exuberant.

· Inflation expectations are well anchored. Long-term inflation expectations from consumers, professional forecasters, and bond markets are averaging 2.4%, just slightly higher than the 10-year average of 2.3%. 

· The pace of shelter inflation is unsustainable. Still, in absolute terms, shelter accounts for more than double its typical contribution to CPI, and the New Tenant Rent Index, Zillow, and Corelogic all suggest CPI rent inflation should decline over 2024 and 2025.

 

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