Headline inflation fading, but underlying price pressures persis
Headline inflation fell to 5.0% in March from 6.0% in February, below market expectations and clocking the weakest reading in nearly two years. Inflation has now declined for nine months in a row, and is nearly half its mid-2022 peak. That said, core inflation is proving stickier, and ticked up to 5.6% in March.
The only way is down
Our Consensus is for inflation to continue to ease over the course of this year amid a slowing economy and tougher base effect, but to remain above the Fed’s 2.0% target this year and next. The discrepancy among panelists is large though; Q4 2023 inflation forecasts among the 30+ analysts we poll range from 2.0% to 4.4% for example.
Fed nearly done
With inflation weakening more than expected and recent banking turmoil likely to tighten financial conditions ahead, the Fed should be close to the end of its tightening cycle. Our Consensus is for just one more 25-basis point hike in Q2. The recent release of the minutes of the Central Bank’s March meeting confirms this view; board members already discussed pausing tightening last month.
The drooping dollar
The dollar has lost ground so far this year, and now trades at 1.10 per EUR compared to 1.07 at the start of 2023—a far cry from the below-parity readings observed in Q4 last year. Going forward, dipping inflation and the likely end of the Fed’s tightening cycle will keep pressure on the dollar, which we currently forecast to end the year at around its current level.
Insights From Our Analyst Network
On March’s inflation report, TD Economics’ Thomas Feltmate said:
On the outlook for rates, analysts at United Overseas Bank said:
In this special report, we examine recent banking turmoil and its implications. We polled 21 of our analysts to get their insight on the following key questions: