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What’s next for US inflation?

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:
“Digging into the details of this morning’s report, the two most encouraging developments were the deceleration in shelter costs – slowing to its lowest pace of monthly growth since November 2022 – and the outright decline in food at home prices. Outside of that, there was little to get excited about. Core goods prices accelerated by its fastest month-on-month pace since August 2022, while non-housing service inflation showed little signs of moderating. Perhaps more worrying for policymakers is the recent uptick in inflation expectations. According to the Survey of Consumer Expectations for March, year-ahead inflation expectations rose to 4.7% – up from 4.2% in February – marking the first uptick since last October.”

On the outlook for rates, analysts at United Overseas Bank said:
“If our base case of no systemic impact on the US financial sector remains valid, it is reasonable to expect the US Fed to continue to stay focused on fighting inflation and push forward with its rate hike cycle. Thus, we will continue to assign a high probability the Fed will hike rates by a final 25- bps to 5.00-5.25% at the upcoming May FOMC. We expect no rate cuts this year and this terminal rate of 5.25% to last through 2023.”


A report cover about banking turmoil
 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:
  • Will further banks go bust in the next year?
  • How will recent bank collapses affect the U.S. and European economies?
  • Will recent events morph into a broader financial crisis?

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