How High for CPI and Why?

(Editor’s note: these answers were submitted in April.)




Greg Curtis, Greycourt 

I can’t pinpoint the exact number but the CPI will be above the Fed’s long-term target of 2%. Even if the US economy slows down – a big if – the wealth effect from stock market appreciation and continued spending by more affluent households will keep inflation higher than the Fed would like it. And although you didn’t ask, the Fed is wrong about that. Inflation of 2.5% – 3% would be healthy for the economy after so many years of financial repression (artificially low rates imposed by the Fed).

Jonathan Dane, Defiant Capital Group

We expect inflation will remain elevated throughout ’24 and likely end the year above the Fed’s 2% target. The US economy is strong, and while strong economic growth bodes well for the stock market, it also means inflationary pressures are less likely to subside. The key disinflationary pressures that drove inflation down after COVID (declining oil prices, reduction in consumer goods prices, supply chain reset) are subsiding, which leaves the level of interest rates the sole catalyst to further reduce inflation. Therefore, without additional macro support (e.g. lower oil prices), a slowdown in the US economy, or weakening of the labor market (which we don’t expect), we view a reduction in inflation to 2% as unlikely near-term.

Win Smathers, Shorebridge Wealth Management 

Despite the recent uptick in inflation to start the year, I see the CPI trending lower by year end but hanging stubbornly above 3%.  Most of the Covid related supply chain issues have been resolved but wages, services and energy costs remain high.  I’m in the camp who believes the Fed is unlikely to cut rates this year.  The economy is too strong to warrant easing.  However, the weight of the restrictive rate environment should eventually nudge inflation next year closer to the Fed’s 2% mandate.

Brian Tarquinio, The WTL Group, Morgan Stanley

Since all investible assets are valued as a function of interest rates, getting the inflation rate forecast right is important as that’s baked into the interest rate cake.  Investing is about what can potentially happen in the future (unknowable by definition), so it matters how close you get in your forecast.  There are several different measures of inflation, each of which measure different things: CPI (consumer price index), CPI excluding food & energy, and PCE (personal consumption expenditures).  The “science” of understanding inflation is an imprecise one.  There are four main schools of thought:  Quantity Theory of Money, Demand Pull Theory, Cost Push Theory and the Structural Theory (as if Fed chair Jerome Powell’s job weren’t challenging enough!).  Rare is the human who can synthesize all these theories, so predictably the 12 Federal Reserve presidents, economists, and analysts can and do arrive at different estimates of inflation from their training.  Per our GIC’s March capital market assumption updates, Morgan Stanley expects inflation to settle around 2.4% over a 20-year secular horizon.

James Armstrong, Henry Armstrong Associates 

Short-run predictions of any economic metric are notoriously unreliable. The US economy and the global economy, which are now closely linked, are too complex to forecast accurately over a period measured in months. Accordingly, such a forecast would have no utility to a long-term investor. And long-term thinking is the most effective way to invest, we believe.  That said, once inflation takes hold, it usually remains stubbornly high. The enormous government spending, whether for Covid relief or for infrastructure, along with an unprecedented period of interest rates held near zero, are inflationary. It may take a long time for prices to stop their upward climb. 

Beth Genter, Schenley Capital
Over the past two years, inflationary pressures have been notably high. However, commendably, the Federal Reserve has diligently managed to rein in inflation, steering it towards their targeted long-term goal of 2%. It’s important to acknowledge that achieving this goal hasn’t been without its fluctuations, as evidenced by occasional short-term volatility in the Consumer Price Index (CPI). Nevertheless, we maintain confidence in the Federal Reserve’s strategy, recognizing that the journey toward their objective is rarely without bumps along the road. With the recent trajectory of the CPI data, it appears the Fed has attained the insights they sought and are now seeking confirmation as they proceed. The economy continues to be robust, consequently, we anticipate a forthcoming decline in inflationary pressures in 2024. This demonstrates the Federal Reserve’s adept handling of monetary policy, instilling a sense of assurance in the stability of the economic landscape.

Tim Rice, Smithfield Trust 

As we assess financial markets through the start of 2024, the enduring challenge of inflation’s “stickiness” and the uncertainty surrounding the market’s largest companies continue to cast a shadow over the broader market.   In our opinion, inflation will moderate to a range of 2.0% – 3.0% by the close of 2024.  In conjunction with higher interest rates, we foresee deflationary pressures stemming from the Federal Reserve’s ongoing implementation of “quantitative tightening.”  

Linda Duessel, Federated Hermes

At 3.5% now, we think it’ll meander to 3.3% by year end. Wage inflation is proving sticky as Boomers retire in droves. Housing inflation has also been sticky thanks to huge demand from the Millennial and Gen Z cohorts, 90+ million in each. Record construction of apartment units should ease rental costs. 

Joseph A. Scarpo, CAPTRUST

There are lots of factors that affect the CPI and make it difficult to forecast. In 2024, we expect inflation will continue to move toward the Federal Reserve’s 2% target, but it will likely not follow a linear path to get there. So far, the country has seen significant progress in reducing inflation on prices of goods. However, inflation related to core services like home remodeling remains elevated, due in part to rising wages. There are also a few sticky components of inflation, such as the prices of home purchases and rental properties, that operate with a significant time lag. Other categories that have been outsized contributors to price increases, such as auto and home insurance, still reflect disruptions stemming from the COVID-19 pandemic, and rising energy prices could serve as a headwind later this year. Investors should aim for portfolios to be invested in and allocated in a way that generates returns above the percentage being lost to inflation. Overallocation to cash and short-term fixed income investments rarely accomplishes this objective. A more balanced approach with investments in both stocks (for growth) and bonds (for predictable income) over full economic cycles has proven to be a sensible strategy.

Doug Stirling, Stirling Wealth Management at Janney Montgomery Scott

Inflation peaked at 9.0% in June of 2022 and has been moving steadily lower since then and now stands at a little over 3.0%. There were two major drivers for the spike in inflation. The first was the pandemic lockdowns that disrupted supply chains, especially in China. The second factor was the massive fiscal stimulus applied to combat the impact of the pandemic lockdowns which resulted in excess demand – especially for hard goods earlier in the pandemic which added to the supply chain stress.

China is fully reopened and supply chains are essentially functioning normally now. Excess demand for hard goods receded as the economy reopened with demand shifting back toward services. All of this is leading to the economy functioning normally after the pandemic shocks. 

The Federal Reserve is projecting that inflation will fall to 2.4% by year end and we think there is a good chance that this will happen. Leading indicators for major inflation drivers, including shelter and wage inflation, continue to recede toward pre-pandemic levels that should allow inflation to head toward the Federal Reserve’s 2.0% inflation target.

Loyd J. Johnson, First Commonwealth Advisors  

Like others, we expect continued improvement in the headline CPI and core CPI between now and the end of 2024. As companies look for ways to control costs, we see slower hiring and an uptick in the pace of layoffs leading to modestly higher unemployment. The cooling in the labor market should also correspond to more easing in wage pressures. As the pace of wage growth slows, we expect to see consumer spending slow as well. Softer spending brings demand and supply into closer alignment, further alleviating inflationary pressures in the second half of the year, particularly in services. To be clear, we don’t expect labor markets, demand, or the broader economy to be weak this year, just less robust than we were at the start of 2024. Inflation remains on track to grind lower, and by year end we look for headline CPI to be around 2.7% and core CPI at 3.0%.

Dan Eye, Fort Pitt Capital Group 

Investors and central bankers have been encouraged by the substantial progress on the inflation front since the peak in June of 2022 at over 9%. However, the downtrend has slowed considerably, with recent headline inflation readings stuck above 3%. Goods prices have begun to reaccelerate with a recovery in the manufacturing sector and rising energy prices. In addition, the cost of services remains sticky and indicates that higher interest rates haven’t done enough to alleviate pricing pressures in the services side of the economy.  

Despite the recent bumps in the road, we still expect to make some incremental progress on inflation throughout the year. We expect headline CPI to moderate from the 3.2% reading in February to 2.75% by year-end. Central to this view is expectations for wages to continue to cool, fading excess consumer savings levels, and the big one – lower rental inflation. Rents are by far the largest component of inflation. And it’s well understood that rents are significantly overstated in the official inflation readings due to the use of stale data. It’s just a matter of time before this lagged data issue is resolved and helps to bring inflation down. The Fed is well aware of this dynamic and we think it’s the main reason they are comfortable signaling interest rate cuts on the table even before reaching their 2% inflation target. 

Olu Omodunbi, Huntington National Bank 

Inflation has come down significantly in the past year thanks to an expansion of the supply side of the U.S. economy. Supply-chain conditions have improved, leading to goods disinflation. Also, a rebound in immigration in 2023 helped soften the labor market and moderate wage growth. We expect inflation to slow further in 2024 as tight monetary policy continues to weigh on consumer spending and the labor market softens further. Housing inflation should also contribute to weaker inflation. Rent increases have slowed in markets and this should show up in official government data later this year. Yearly headline CPI inflation was 3.5 percent in March, and we expect it to be slightly below 3 percent by the end of 2024.

David Root, Jr., DBR & CO

While we do not forecast absolute CPI levels, we do hold views on the relative direction of inflation. In particular, we think headline CPI will remain above the Federal Reserve’s 2 percent target for the remainder of the year, and perhaps even above consensus estimates which are around 2.5 percent for the fourth quarter. We think this is possible for a few reasons. First, inflation in services has proven quite persistent relative to goods, and we suspect this will continue to prop up prices. Second, we are seeing a sharp reacceleration in prices along supply chains—think shipping, freight, and transportation costs. Third, because we saw disinflation throughout most of 2023, year-over-year comparisons will get easier to beat.

Another key piece—if qualitative in nature—is the Fed’s communications and the market’s subsequent interpretation. If Fed Chairman Powell has made anything clear over the past two years, it is that he is determined to bring inflation back to target. Most believe he will do whatever it takes to make this happen. The market has already gone from pricing in six rate cuts in 2024 to pricing in three cuts, and some have reduced their expectation further to two cuts. To us, this signals that the fight against inflation will not conclude as soon as many might have thought last year.

Brian Pietrangelo, Key Private Bank

We anticipate the change in 12-month CPI inflation will continue to moderate but remain higher than market participants expect – ending the year at around 3.0-3.2 percent.  This level will still be well above where the Federal Reserve prefers it to be (2.0 percent) and is a result of stronger economic growth, in terms of overall economic activity (GDP), employment and corporate earnings.

Despite the Fed’s best efforts to keep interest rates in a “higher-for-longer” status, the intended effect of slowing the economy to bring inflation down has not materialized as quickly as desired.  As Goods inflation has normalized post-pandemic, it has actually become deflationary; however, Services inflation continues to run hot at over 5.0 percent year-over-year, due to strong demand and wage inflation above pre-pandemic levels.  Rising energy prices may also play a role.  Finally, Shelter inflation continues to remain higher than expected, primarily due to low supply of housing inventory.  Shelter represents more than 33 percent of the overall inflation calculation, and until Shelter inflation moderates, it will be difficult for overall CPI to moderate.  In summary, although inflation has receded from its peak at 9 percent in June 2022, we still have a way to go before we return to 2 percent inflation.

Alison F. Wertz, Bill Few Associates,

Inflation has come down a lot in the past year but seems to be stuck in the high 2 to 3 percent range.  Just a week ago, I would have more confidently predicted we would still be in that range by year-end.  Since then, Iran has launched a historic military attack against Israel and Israel has retaliated. This marks a new escalation in a long-standing conflict in the region which increases the risk of a broader conflict. This one event could potentially increase oil prices, create supply chain disruptions, increase government spending, and prompt investors to demand higher risk premiums, all of which are inflationary. This doesn’t necessarily change our view on inflation, but it exemplifies how one event can potentially change the landscape in both direct and indirect ways.  Although our investment process is not driven by a single economic gauge, we keep an eye on inflation in order to provide comprehensive and holistic financial advice to our clients.

Matthew George, PNC Private Bank

PNC is forecasting that CPI inflation will slow to about 2.8 percent on a year-over-year basis at the end of 2024, down from 3.5 percent as of March. The slowing inflation will come from a stabilization in energy prices, falling prices for new and used cars, and slower growth in housing costs. There has been a significant slowing in measured lease rates for apartments. Those work their way into the CPI with a lag and will become more important in 2024. Inflation for homeowners will also slow over the course of 2024. Weaker growth in wages will contribute to slowing inflation for non-housing services.