US Inflation Review: October 2023

​​Truflation: US Inflation Update 

October 2023

At the latest Federal Open Market Committee (FOMC) meeting on 1 November, the Federal Reserve decided to keep interest rates unchanged at 5.25%-5.5% for the second month in a row. The market took this as an indication that the central bank is now done with rate hikes, rebounding after weak September and October performance, which had been driven by global uncertainty. 

Over the year to November 1, 2023, the Nasdaq index has been the strongest performer with a return of 25.8%. The S&P 500 index is up 10.8% over the same time period, while the Dow Jones Industrial Average has seen a more muted performance of 0.4%. The recent two-month drop in performance appears to have been a short-term blip, and market sentiment has now improved. Indeed, the S&P 500 is expected to gain another 16% over the next 12 months.

However, despite the market’s exuberance, it is likely that interest rates will remain higher for longer. Fed Chairman Jerome Powell has repeatedly reiterated his commitment to the dual mandate of maximizing employment while bringing down inflation to the 2% target. Yet, as we highlighted in last month’s Inflation Report, the days of easy disinflation are over, and now the hard graft begins. Policymakers require a deeper understanding of the structural drivers of inflation and the impact of monetary tightening in order to bring it down to the 2% target.

Gaining this insight will be a difficult task for the Fed as mixed data continues to paint a murky picture of the US economy. On the one hand, GDP growth in Q3 outpaced expectations of a 4.7% rise with a 4.9% increase, driven by strong consumer and government spending. The labor market also remains tight, while the most recent earnings season revealed that companies expect consumers to hold up better than expected, forecasting an increase in sales in Q4 and heading into 2024.

However, consumers are now feeling the pain of elevated interest rates. Not only are these impacting debt repayment and curbing Americans’ ability to purchase new homes or vehicles, but higher-for-longer interest rates may also be driving the housing market into a recession.

Against this mixed backdrop, Truflation’s real-time US CPI index reveals a marginal decline during October, finishing the month at 2.4%. Truflation is projecting the BLS inflation reading for October to come in at 3.3%, marking a significant drop from September’s 3.7% but still way above the Fed’s 2% target.

The emergence of conflicting data sets

In October, we saw the Truflation US CPI Index fall to 2.63% from September’s 3.29% year-over-year (YoY), with a 0.01% month-over-month (MoM) increase. However, we are seeing a monthly increase of 0.14% in the Truflation Core CPI, which brings it more in line with the headline CPI index on a YoY basis. Given the importance of Core CPI to the Fed and its decision-making process, it is a critical measure to watch.

The Fed’s objective is to balance maximum employment (i.e. low unemployment) with stable prices (i.e. inflation at 2% or lower). However, given the amount of time it takes for policy decisions to be reflected in economic data, the central bank still does not have all the pieces of the puzzle to inform its policy decisions. 

While certain factors, such as productivity and personal savings, can be calculated to some extent, other factors are unobservable. These include the natural rate of unemployment (i.e. resulting from economic forces we cannot calculate due to too many variables), the impact of technological changes, and government spending and incentives.

In addition, while there is still a belief among some market watchers that economic conditions follow the Phillips Curve, which stipulates that inflation and unemployment have a stable and inverse relationship, this doesn't hold true in today's economic climate. As such, it is critical to understand both the background causes of disinflation and the structural elements of inflation to help guide the next policy decision in December. As more data is released over the coming months, it will no doubt enhance that decision process.

So far, recent data releases suggest the US economy has remained robust. The Q3 GDP number came in at 4.9% – nearly double Q2’s 2.5% growth and beating analysts’ predictions of 4.7%. This growth has been driven by consumer spending, which accounts for two-thirds of US GDP, as well as local and federal government spending. As such, recent data suggests the Fed has managed the soft landing well.  

However, this economic strength is unlikely to continue into 2024. According to the Federal Reserve Bank of Atlanta, Q4 will see growth slow down to 2.3%. Meanwhile, Richmond Fed President Thomas Barkin recently said that the robust economic data does not match his on-the-ground observations. He sees an economy that is much further along the path to demand normalization. His comments clearly highlight the lag in the data when it comes to the impact of monetary policy and suggest consumers are facing headwinds as the year draws to a close. 

Indeed, higher-for-longer rates will likely drive a further economic slowdown, given tighter credit conditions, persistent uncertainty over government infrastructure spending, pressure on the housing market, and, of course, inflation. Individually, these factors are unlikely to drag the US into a recession. However, if they persist into 2024, they could have a more profound impact on economic activity. 

Yet given the strong GDP growth in Q3, it is no surprise that we have seen strong retail sales in September, up 3.75% YoY and 0.7% MoM. Despite high interest rates and concerns over a potential future economic slowdown, consumers are still spending like there’s no tomorrow. 

Graph 1: Monthly Retail Sales and Inventories - Adjusted

Source: US Census Department; Advance Monthly Retail Trade Survey

The 0.7% rise in retail sales significantly overshot the Dow Jones estimate of 0.3%, propelled by gas station sales, which contributed 0.9% to the headline number as prices at the pump accelerated again. 

Sales gains were broad-based, with the biggest monthly increase of 3% coming from miscellaneous store retailers. These numbers are not adjusted for inflation and, taking into account September’s BLS CPI rise of 0.25%, they indicate that consumers are keeping up with price increases. This rampant consumer spending certainly adds complexity to the Fed’s next monetary policy decision.

At the same time, however, inventory levels remain at their peak, primarily driven by motor vehicles and part dealers, and are still rising on a monthly basis. This suggests that we are likely to see further downward pressure on retail prices in the coming months, in particular in the motor vehicles category.

With consumer spending on the rise, a key question is: how is it being funded? It appears consumers are still borrowing, especially on their credit cards, to fuel their spending patterns. Household debt has hit record levels, up 4.8% YoY and 1.3% versus the previous quarter at $17.29 trillion. Since 2011, all debt categories have continued their upward trajectory. Credit card debt is a key component of this and has increased by $48 billion (4.6% YoY and 4.7% versus last quarter), now standing at $1.08 trillion.

Yet with interest rates likely to remain higher for longer, we expect to eventually see an impact on long-term spending patterns, especially given the restarting of student loan repayments from October 2023.

Graph 2: Household Debt Balance and its Composition; $ Trillions 

Source: Household Debt and Credit Report, Federal Reserve Bank of New York

Beyond accumulating more debt, consumer spending has been supported by the increase in wages thanks to the tight labor market. In September, wage growth continued to outstrip inflation for the fourth month in a row, coming in at 5.31%, though it has steadily decreased from 7.1% in June. Households have also been dipping into their savings. In September, the personal savings rate slipped to 3.4% from 4% in August, hitting the lowest level since December 2022.

Graph 3: US Personal Consumption; Key figures

Source: Bureau of Economic Analysis, Personal Income and Outlays Report

The key concerns with all this spending and the accumulation of household debt are the rising interest on the repayments and the delinquency rates. We have already seen a steady acceleration in delinquency rates on credit card loans, up from 1.55% in Q3 2021 to 2.77% in Q2 2023. Though these remain at historic lows, the upward trajectory is becoming a familiar trend.

Graph 4: Delinquency Rate on Credit Card Loans, All Commercial Banks

Source: Board of Governors of the Federal Reserve System (US)

Finally, employment growth has also remained very tight, with initial jobless claims at 217,000 in the week ending October 27. On top of this, the most recent unemployment rate release showed only a marginal increase from 3.8% in August to 3.9% in September. The US economy added 150,000 new jobs that month, predominantly in the healthcare and government sectors. 

Truflation’s live data stream for labor sector drivers also shows that the number of hires outstripped the number of separations in October, marking the first time since January 2023. This tight labor market continues to defy expectations and we do not expect this to change in the short term.

Evidently, the economic picture remains mixed, making the Fed’s next move perhaps the most difficult one of the entire cycle. While the central bank has made progress in bringing inflation in line with its 2% target, it remains well above this goal. At this stage in the cycle, it is clear that lower economic growth will be required for the final push. 

Indeed, inflationary pressures are likely to last for longer than anticipated, which will dictate monetary policy decisions. In a recent report, the International Monetary Fund (IMF) projected that most countries are unlikely to return to target inflation until 2025. This supports the higher-for-longer narrative, even though the market is already pivoting expectations to a rate cut in the first half of 2024.

Recent inflation trends

After a number of months of sticky inflation, we are finally set to see a drop this October. The market’s expectations for the BLS CPI release for October range from 3.1% to 3.6%.  Truflation is expecting the CPI to drop from 3.7% to 3.3%, which represents a significant decline, while on a monthly basis, we expect inflation to increase by 0.01%. 

Looking back at 2021 and 2022, it is clear that inflation accelerated due to strong consumer demand that ran into supply constraints, which caused prices to explode, especially in food and energy. Since then, supply constraints have been slowly disappearing and we are moving into a more demand-driven inflationary situation.

As this shift continues, Truflation is still seeing declines in goods prices. In particular, vehicle prices are decreasing, driven by excess supply. Prices of services have remained more stubborn as a result of strong wage growth and plentiful employment opportunities. Oil prices have also had a dramatic impact on the cost of utilities and the price of gasoline at the pump, but, thankfully, this pressure is abating – at least for now. However, core inflation, which outstrips volatile food and energy prices, is still holding strong and is a key area that needs to be addressed.

In addition, over the last couple of months, the consumer spending boom has reignited concerns over rising goods prices. Although we are not seeing this at present, it is worth being vigilant given the ongoing spending spree. We are also seeing an increase in housing prices,  mainly driven by the supply constraints in the market, though higher interest rates are driving a slowdown in sales activity, in particular in owned housing.

Graph 5: Truflation Core Inflation Measures (Goods vs Services vs Core)

Given the weighting of the services sector, housing, and food in the US CPI index, we still believe an economic slowdown will be required to bring inflation down to the Fed’s 2% target. Most likely, this will take the form of below-trend economic growth and further softening in the labor market, and restrictive monetary policy will play an increasingly important role here.

We are already, perhaps, seeing the harbinger of this impending economic slowdown in consumer data. Truflation’s Consumer Confidence Index has fallen for the third month in a row in October, down to 87.9 from 94.5 in July.  This is being driven by a lack of confidence in the future, lingering concerns over rising prices (especially food and gasoline), the political situation, and higher-for-longer interest rates.

Graph 6: Truflation Consumer Confidence Trends

According to the Federal Reserve Bank of New York’s Survey of Consumer Expectations, consumers feel their financial situations are now worse than a year ago. They also expect worse jobs and inflation prospects over the coming year and have mixed feelings about the jobs market, with the chances that they will voluntarily leave their roles rising.

This comes despite the labor market remaining tight and the unemployment rate rising only marginally at the last reading. This business outlook seems to be contrarian, given the recent strong set of earnings releases and Q4 revenue outlooks.

On a sector level, Truflation’s data reveals that inflation is still heavily driven by a few categories.  The post-pandemic surge began with only a handful of sectors, namely food, housing, transportation, and utilities. Price increases in durable goods were driven by semiconductor shortages and other supply constraints. Energy prices were driven by an unexpectedly strong recovery in demand combined with sanctions against Russia as a result of the war in Ukraine. Food prices were heavily influenced by supply constraints, including diseases such as avian flu, and higher transportation costs.

As supply concerns have alleviated, though, price spikes have also begun to unwind. Now, inflation is primarily driven by soaring consumer demand, especially in the last quarter. Against the backdrop of a tight labor market, inflation has now broadened into other categories, partially offsetting the downward impact of lower energy prices.

Graph 7: Category Percentage Contribution to Truflation CPI

With this in mind, the most significant contributors to upward inflation in October came from housing, utilities, apparel, and communications. Meanwhile, the biggest downward contributors were transportation and food.

Key drivers of upward inflation

Over the past month, we have seen significant upward pressure on inflation from housing, utilities, apparel, and communications. This has been partly driven by rising supply costs for goods and, as consumers continue to spend, demand has been a key driving factor in this upward movement. 

In the housing category, price increases continue to be driven by owned property, which is up 0.54% MoM and 4.2% YoY. As a whole, housing category inflation in October sits at 0.43% MoM and 3.38% YoY. This strong upward trend is driven by the acute shortage of previously owned homes, despite several factors that should, in theory, be causing a decline in prices. This includes the historically high 30-year fixed-rate mortgages, which were at 7.76% on November 1, according to Freddie Mac. Given the Fed’s higher-for-longer monetary policy plans, these elevated rates are set to hold for some time. In addition, soaring tax premiums have also put pressure on the owned property segment.

This is reflected in the total number of existing home sales, which have continuously fallen from 4.3 million in January to 3.9 million in September, according to the National Association of Realtors. As of September, this marks a 17% drop YoY and a 2% MoM decrease. Data from Zillow, Trulia, and Redfin is consistent with this trend.

Graph 8: Truflation Housing Category Price Trends

Despite this, house prices have remained lofty. This, in turn, is boosting household wealth and could keep inflation elevated. However, with mortgage rates at historic highs, we see limited opportunities for house prices to keep rising. We expect this will slow new and existing home sales and will eventually cool price rises in the secondary market. 

Increased capacity in the housing market would obviously lead to a trend reversal in rent prices, which have been soaring but have started to cool down in the last couple of months amid new residential supply coming onto the property market. 

The number of new residential homes has increased by 5.7% YTD in September 2023 compared to YTD in September 2022, and yet the supply still remains scarce. At the same time, a report from the Commerce Department of the Census Bureau revealed that rental vacancy rates jumped to 6.6% in the third quarter, up from 6.3% in the second quarter and hitting the highest level since Q1 2021.

Higher material costs are not helping, as they continue to increase and are beginning to impact the construction industry. New residential building permits and new residential starts are down 16.3% and 12.6% respectively compared to the same period last year. When we take into account a less sanguine outlook for market conditions in Q4 and beyond, we see signs that housing inflation could moderate next year as Americans are no longer able to afford such elevated prices.

Graph 9: Housing Supply; New Residential Permits, Starts and Completes in 000s of Units

Source: US Census Bureau / New Residential Construction Report (all in 000s of Units)

Another concerning variable when it comes to the trajectory of house prices is the fact that corporate America is increasingly expecting employees to return to office work. This will increase the movement of talent across the country and drive demand in certain areas.

There’s no doubt that deteriorating affordability is a major headwind for the US housing market, which has been driven primarily by the lack of existing inventory. This is the primary reason that the spike in mortgage rates has, so far, failed to translate into a greater pullback in national house prices.

The second category contributing to inflation on the upside is utilities. Here, prices have increased 0.53% MoM but declined 0.54% YoY.  The sector has seen consistent monthly price increases, driven by rising natural gas commodities prices. As we head into the winter months, we would expect to see higher utility usage, which is likely to contribute to further inflation in this category.

Graph 10: Truflation Utilities Category Price Trends

Inflation has hit the entire utilities sector and renewable energy is no exception. Developers have worked tirelessly to become more competitive in an effort to make renewables an attractive new source of power. However, recently they have not been immune to pricing pressures. These have come from trade policies (duties on imports from China, anti-dumping and countervailing duties, and the Uyghur Forced Labor Prevention Act), as well as volatile commodities prices, supply chain disruption, high interest rates, soaring labor costs, and the cost of grid connections. 

On the plus side, incentives coming from the Biden Administration are set to support the domestic development of renewable energy sources over the long term and bring down the cost of these technologies, which are crucial to fighting pollution. Eventually, this will feed into the grid and, hopefully, offset the fluctuations in energy costs driven by international factors. It will, however, take time to build the onshore supply chain. 

This trend is even more important if we take into account the outlook for oil prices. Truflation expects oil prices to remain elevated in the short term, given continued tensions between Israel and Hamas which have already caused another price spike. Over the longer term, Saudi Arabia’s and OPEC+ members' lower production targets are also tightening global oil markets. As a result, on October 11, the Energy Information Administration increased its 2024 forecast for the average Brent crude price to $94.91 per barrel, while it expects WTI crude prices to average $90.90 per barrel next year. These are $6.69 and $7.69 higher than last month’s estimate, respectively. The EIA also expects global oil demand to outpace world production for the final months of 2023 and much of 2024, which will continue to put upward pressure on prices.

Turning to the apparel industry, we have seen prices increase by 1.53% MoM and 3.18% YoY, driven by the rising cost of clothing production. Factors that contributed to this include government policies such as import duties, the rising cost of labor, and higher transportation and energy costs. Clothing manufacturers have also been able to use already high inflation as an excuse to raise their prices, where in the past they would have been afraid of losing customers.

Clothing and clothing accessories retail sales have held relatively steady, with a 1.4% growth YTD 2023 compared to the same period in 2022. Inventory levels have risen to 5.33%, but this remains within the typical target range of 5%-8% for the end-of-the-season inventory. It suggests that retailers are clearing out the previous season's inventories in time, despite higher prices.

Graph 11: Clothing & Accessories Monthly Retail Sales & Inventories

Source: US Census Department; Advance Monthly Retail Trade Survey

Communications is another category that has seen an upward trend, with a 0.16% increase MoM and 0.43% YoY.  We see a mixed story here. Cellular services have continued to experience a deflationary environment as a result of increased competition. However, residential phone service prices have been skyrocketing and showing no signs of slowing down, and October was no exception with a 0.82% MoM rise. 

These price increases stem from the Federal Communications Commission (FCC) permitting carriers to adopt market-based pricing and lifting previous price caps on analog-based services.  As carriers have invested to remain competitive and are now offering new and improved services by switching to alternative options, this has allowed them to charge customers the actual cost of landline services. Demand for these improved services has been high as customers switch from the analog system, which suffers from high maintenance and repair costs, and support the old copper wire technology instead. 

Graph 12: Truflation Communications Category Price Trends

Finally, other upward contributors to inflation in October include health, up 0.11%, MoM but down 1.87% YoY, education, which has increased 0.68% MoM and 4.14% YoY, and others, up 0.09% MoM and 6.03% YoY. These increases were predominantly driven by the tight labor market and a general rise in the cost of resources, with neither trend looking likely to shift any time soon.

Categories continuing to apply downward pressure

In October, two main categories contributed to the deflationary trend: transportation and food.

The transport category is the single biggest contributor to this downward trend, down 0.79% MoM, which brings the annualized growth rate down to 3.27% YoY. In particular, this was driven by a 4.92% MoM drop in gasoline prices, which are now down 5.07% YoY.  Since crude oil prices peaked in Q3, we have seen gas prices slowly and steadily edging lower. 

As we enter the winter months, gas prices can be expected to continue to fall as refineries come back online after maintenance work, boosting supply as a result. However, it is important to keep an eye on the oil markets, which will likely react negatively if the war between Hamas and Israel escalates. Oil prices account for roughly 50% of what consumers pay at the pump, so further increases would drive these costs higher for consumers.

Graph 13: Truflation Transportation Category Price Trends

Additional supply restrictions by OPEC+ may also impact strategic petroleum reserves in the future, though for the last couple of months these have held steady.

Demand for new and used cars has significantly waned since the early months of 2023. Rising interest rates on financing costs and excess inventory have placed downward pressure on vehicle prices in the last five months. Auto retail inventory continued to rise from $220.7 billion in June to $229.2 billion in August 2023. As a result, vehicle purchases (new and used) are down 0.07% MoM and 0.13% YoY. As inventory levels outstrip demand, we expect prices in this category to keep falling.

Graph 14: Motor Vehicle and Parts Dealers in $ Millions; Adjusted Sales and Inventories

Source: US Census Department; Advance Monthly Retail Trade Survey

Looking at the electric vehicle (EV) market, Tesla is facing increasing cost pressures. Panasonic, its long-standing partner and battery cell supplier, stoked concerns about sluggish demand for EVs, especially for higher-priced EVs that may not qualify for tax breaks or other government incentives. With this in mind, the EV market is now seeing similar trends to the overall motor vehicle category.

In further positive news for consumers, the food category has seen another decline in inflation in October, down 0.25% MoM. However, on an annual basis, prices are still 1.99% higher. The recent monthly slowdown is evident in both grocery prices (food at home) and the cost of dining out (food away from home).

Graph 15: Truflation Food & Beverage Category Price Trends

The continued slowdown in food prices is down to several factors, though these impact food at home and food away from home to different degrees. These factors include:

• Higher labor costs as a result of wage increases.
• Higher production costs, which have increased 4.1% so far in 2023 according to the US Department of Agriculture.
• Lower than average crop yields in the US as a result of droughts and wildfires in the Western US.
• Continued supply chain issues since the pandemic, including the ongoing war in Ukraine, the breadbasket of Europe, which has impacted the country's ability to export food. Ukraine historically accounted for 9% of the global wheat market and 12% of the world’s corn supply.
• Import duties, particularly on products coming from China, though these will soon be baked into the YoY food inflation number.

With all this in mind, we expect food prices will continue to rise for the rest of 2023, albeit at a slower pace. Looking ahead into 2024, we will likely see a continued deceleration in inflation, but not a decline in prices.

Food away from home saw a decline of 0.55% MoM in October, while annualized inflation in this category has slowed to 3.38% YoY. Restaurant operators have had to keep their menu prices elevated to protect margins amid relentless inflation and, for the most part, consumers have proven willing to accept this. However, this appears to be fading fast. 

Consumer sentiment data from HundredX shows that consumers are increasingly unhappy with rising prices. Q2 traffic at quick service restaurants has decreased by 1.8% YoY, according to Revenue Management Solutions. On average, prices increased by 10% in Q2, but they have now started to cool compared to last year. It appears consumer spending fatigue is finally beginning to set in.

This is also reflected in the retail sales for food services & drinking places, as recorded by the Census Bureau. Growth here has declined from 23.4% YoY in January to 9.2% YoY in September.  Credit card data from the SpendTrend Report also backs this up, with YoY growth rates dropping from 9.7% in February to 5.4% in September. This will be important to watch, given the conflicting data sets, to provide us with a longer-term outlook for consumer confidence. 

Other sectors seeing deflationary trends include household durables and daily use items, down 0.12% MoM but up 4.99% YoY, and alcohol & tobacco, down 0.10% MoM in October but up 4.11% YoY.  These two sectors are experiencing marginally weakening demand. However, the prices of the service elements in the household durables and daily use items sector remain elevated due to the continued tightness of the labor market.

The battle against inflation is far from over

The Federal Reserve is looking for a unicorn with its current monetary policy stance. Policymakers are holding interest rates stable for longer and hoping this will be enough to bring down inflation to the 2% target, without the need to address the structural issues driving price increases. 

However, there are a number of factors the Fed must consider. Firstly, over the past few quarters, inflation has outpaced wage growth and consumers have been making up the difference by spending their excess savings, which were temporarily boosted by various COVID relief programs.

The personal savings rate has dropped to 3.4% and it would be safe to assume that the bulk of what remains is concentrated among the higher-income households. For those below the 50^th percentile of wealth, those savings are gone and they are living from paycheck to paycheck. As such, many consumers must either cut spending or take on debt. However, with credit conditions as tight as they are, higher credit card balances, car loans, and second mortgages are looking far less attractive.   

On top of this, student loan repayments have restarted, which will remove roughly $100 billion from household budgets every year. It will be relatively easy to cut down on costs for the affluent: simply trim a few restaurant meals and attend fewer sporting events. For the less well-off, though, these adjustments will prove much tougher.

At the same time, rising oil prices will push up the cost of gasoline and heating oil, feeding through to transportation, construction, and household products. If the war in Gaza continues for a sustained period of time, this could easily keep oil prices higher, which will have a significant impact on the CPI over several months. This will have a knock-on effect as corporations exercise their pricing power in a bid to address higher oil prices, the increased tightness in the labor market, and tightening supplies of other commodities.

Several factors are also likely to continue driving wage increases. Firstly, companies are hiring most staff for the holiday season. For example, Amazon is adding 250,000 warehouse and fulfillment workers and boosting the average pay to around $20.50 per hour. Secondly, the outcome of the auto workers' strike will also push up wages and have knock-on effects on other services, which will boost consumer confidence and raise inflationary pressures.

Even if the Fed continues its current strategy, it is unlikely to bring inflation below the 2% target while avoiding a recession due to the structural issues driving inflation. These need to be addressed before we can expect inflation to come down. The main issues are:

• Demographic shifts: The middle class is eroding, while its growth is fostered by the culture of consumption. Today, those in the middle of the income spectrum are finding it harder to pay for housing, education, and healthcare. While the incomes of US working-class households have been stagnant since the 1980s, medical costs have gone up more than two and a half times, while education costs have increased six-fold. The middle class has been steadily contracting over the past five decades – the Pew Research Center estimates a drop from 61% of the population in 1971 to 50% in 2021. With society becoming more unstable and prone to polarization and disharmony, the middle class is socially and politically divided.
• Globalization: Or, more accurately, de-globalization, which translates to protectionism.  As we move away from cooperating on a global scale, this will increase the scarcity of resources. Walls around our borders will drive up costs on a local market level. The question is, how much deflation have we experienced as a result of China manufacturing goods for the US and what will be the impact of removing this?
• Cost of capital: If interest rates stay higher for longer, we will likely see a continued slowdown in innovation from Silicon Valley or elsewhere due to a lack of funding and lower availability of capital. Government spending on infrastructure, green energy, technological innovation, and the semiconductor supply chain will fuel continued growth in on-shoring over the long term. However, in the short term, the oxygen has been pulled out of the system and the higher cost of capital is stifling innovation.

So what does all this mean for Truflation’s Q4 inflation forecast?  We expect headline inflation to remain sticky, with ongoing monthly increases of 0.1%, which would result in a full-year inflation forecast of 3.6% in December.  The background drivers for this are:

• Housing prices will remain elevated due to supply constraints
• Oil prices will be impacted by the war in Gaza and OPEC+ production cuts
• Continued tightness in the labor market, with wage increases holding firm
• Corporations taking advantage of higher interest rates and the inflationary environment to flex their pricing power, albeit at a slower rate

Looking at consumer-based inflation expectations surveys from the University of Michigan and the Federal Reserve Bank of New York, which represent the sentiment of American households, we can see that consumers have been anticipating upward inflation on a one-year horizon.

Graph 16: Consumer Inflation Expectations (2% is the Fed Target)  

Source: Fed Reserve Bank of New York - Survey of Consumer Expectation & University of Michigan Expected Inflation Rate

Looking ahead into 2024, we believe inflation will gradually ease, driven by slowing housing and oil prices and a softening of the labor market. However, the road to the Fed's 2% inflation target will be long and hard and will likely result in Fed Chair Jerome Powell having to keep his foot on the brakes and let the US economy take a short-term hit.

About Truflation

Truflation provides a set of independent inflation indices drawing on 30+ different data partners/sources and more than 12 million product prices across the US. The indices are released daily, making it one of the most up-to-date and comprehensive inflation measurement tools in the world.

 Truflation has been leveraging this measurement tool to predict the BLS CPI number. Since Truflation initiated coverage, four predictions were spot on, with all but one deviating by no more than 20 basis points. However, Truflation’s own US CPI index is currently much lower than the government’s reported inflation figure.

APPENDIX A

Category Percentage Change Data; Month on Month and Year on Year

All Data is Based on October 2023 Data

Truflation Categories                                MoM%    YoY%

Food & Non-Alcoholic Beverages -0.25% +1.99%

Housing +0.43%        +3.38%

Transportation -0.79%         +3.27%

Utilities +0.53%        -0.54%

Health +0.11%        -1.87%

Household Durables & Daily Use Items -0.12%         +4.99%

Alcohol & Tobacco -0.10%         +4.11%

Clothing & Footwear +1.53%        +3.18%

Communications +0.16%        +0.43%

Education +0.68%        +4.14%

Recreation & Culture -0.09%         +3.97%

Other -0.09%         +6.03%

Total CPI +0.01%        +2.63%

Truflation Goods -0.19%         +1.45%

Truflation Services +0.00%        +3.48%

Truflation Core +0.14%        +2.82%

Truflation Non-Core -0.98%         +0.57%