Inflation will surprise investors again in 2023

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Thursday, January 12, 2023

Today’s newsletter by Miles Oddland, Head of News at Yahoo Finance. Follow him on Twitter @tweet and on linkedin. Read this and more market news on the go Yahoo finance app.

The final consumer price index for 2022 is due Thursday morning and is expected to show prices up 6.5% from a year earlier in December.

Going into 2022, the inflationary talk centered around whether the price hike would be “temporary”.

The answer was decisive: inflation was not temporary.

So as 2023 begins, the talks are now focused on how entrenched inflation pressures are and how far the Fed might need to cut them.

Take the comments of Jamie Dimon, CEO of JPMorgan (JPM), for example, who said in an interview this week that “the Fed may raise interest rates to 6% in order to bring inflation” to where it needs to be. “

The Fed’s latest projection says rates will reach 5.1% this year.

JPMorgan Chase and Company President and CEO Jamie Dimon testifying before the Senate Banking, Housing and Urban Affairs Hearing on

JPMorgan Chase and company President and CEO Jamie Dimon testify before a Senate Banking, Housing and Urban Affairs hearing on the “Annual Oversight of the Nation’s Largest Banks,” on Capitol Hill in Washington, US, September 22, 2022. REUTERS/Evelyn Hochstein

And just as inflation provided investors with continuous surprises in 2022, it is set to do the same in the new year. Only this time the surprises will be in reverse.

In a note to clients published earlier this week, Ian Shepherdson of Pantheon Macroeconomics explored a question he’s been asking clients recently: Will inflation finally be negative this year?

In Shepherdson’s view, the path to getting headline inflation as measured by the CPI from 6.5% to less than 0% is unlikely.

But the economist finds that the Fed’s forecasts of price changes were wrong again this year, except this time the central bank will be very pessimistic about how slow price increases are.

The decline in rents and margins should lift core inflation to a monthly rate of 0.2% by the middle of the year. Meanwhile, absent another hike in oil prices, gasoline prices could be down about 30% from a year earlier come early summer, Shepherdson notes.

Moreover, food prices, which rose 12% from a year ago in November, should ease significantly as food commodity prices decline, with household food price increases close to 0% by the end of 2023.

Inflation pressures are expected to decrease significantly during 2023, although such a slowdown in price increases, leading to a drop in the headline inflation rate below 0%, remains unlikely.  (Source: Pantheon Macroeconomics)

Inflation pressures are expected to decrease significantly during 2023, although such a slowdown in price increases, leading to a drop in the headline inflation rate below 0%, remains unlikely. (Source: Pantheon Macroeconomics)

“We have no problem making our base case that inflation is not setting the course the Fed’s projections indicate, but that a dip below zero is a long shot,” Shepherdson wrote. “It’s not impossible, but it is a distraction from the larger point, which is that the Fed will have to recognize that inflation pressure is fading faster than it expects, regardless of whether the final destination is 2%, zero, or -2%.”

In 2022, anyone who said the Fed would be wrong about inflation turned out to be right: inflation rose at the fastest pace in 40 years and the central bank was playing catch-up all the way.

And if Shepherdson’s point turns out to be correct this year, the central bank will scramble again.

But this time in the opposite direction.

“Chair Powell has made it very clear that the Fed will not be in advance of the next decline in inflation, but they will not be able to ignore it once it becomes clear to the markets that the downward shift is real,” Shepherdson wrote.

What are you watching today

Economie

  • 8:30 a.m. ET: Consumer price indexon a monthly basis, December (0% expected, 0.1% over the previous month)

  • 8:30 a.m. ET: Consumer price index excluding food and energyon a monthly basis, December (0.3% expected, 0.2% over the previous month)

  • 8:30 a.m. ET: Consumer price indexyoy, December (6.5% expected, 7.1% yoy)

  • 8:30 a.m. ET: Consumer price index excluding food and energyon a yearly basis, December (5.7% expected, 6.0% over the previous month)

  • 8:30 a.m. ET: Real Average earnings per houryear-on-year, December (-1.9% over the previous month, revised to -2.1%)

  • 8:30 a.m. ET: Real average weekly earningsyear-over-year, December (-3.0% over the previous month, revised down to -3.3%)

  • 8:30 a.m. ET: Unemployment claims ratesweek ending Jan 7 (expected 214,000, 204,000 over the previous week)

  • 8:30 a.m. ET: Continuing claimsfor the week ending December 31 (1.694 million over the previous week)

  • 2:00 PM ET: Monthly budget statement (-60 billion USD expected, – 21.3 billion USD over the previous month)

earnings

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