Anticipated Continued Deceleration in US Inflation: Insights Into the Trend


US inflation has been on a steady decline since its peak last June, and this trend is projected to persist, thanks to a decrease in car prices and rents. If the US job market also experiences a slowdown, this could further contribute to lowering inflation rates.

While surging energy costs have elevated "headline inflation" (Consumer Price Index rose 3.7% in August from the previous year), "core inflation," which excludes volatile food and energy prices, saw a decrease to an annual rate of 4.3% in August, down from July's 4.7%.

Economists are collectively anticipating a continued deceleration of inflation in the upcoming months.

José Torres, senior economist at Interactive Brokers, highlighted, “Right now, we’re seeing some weakening price momentum in goods overall, particularly used cars, but we’re also seeing new vehicle (prices) slow down, and we think that prices will continue to come down into year-end."

Factors such as high interest rates and reduced credit availability are dampening demand in the automobile sector, making it challenging for consumers to make purchases.

Used car and truck prices dropped for the third consecutive month in August, experiencing a 1.2% decrease from July, and a 6.6% decline from the previous year. In contrast, new car prices only saw a modest 0.3% increase in August from the previous month.

However, an ongoing strike by the United Auto Workers could potentially disrupt the expected decline in vehicle prices if inventories deplete due to reduced production.

Shelter costs, a significant component of the Consumer Price Index, are also poised to slow down in the coming months. In August, these costs rose by 0.3% from the previous month, marking the smallest gain since January 2022.

Sarah House, senior economist at Wells Fargo, noted, "We’ve seen rental costs decelerate pretty sharply over the past year. We’re seeing rents for single-family homes also moderate pretty extensively, and so as that starts to show in the official measures of inflation, we think that there’s a lot more weakness to come out of that sector."

Furthermore, the expected cooling of both the job market and the broader economy could contribute to alleviating inflation in the services sector, encompassing services provided at establishments like restaurants and hospitals.

A recent report from the San Francisco Fed suggests that shelter inflation may turn negative in the latter half of 2024, potentially leading to decreases in both headline and core inflation.

Saira Malik, chief investment officer at Nuveen, highlighted that financial markets, like the Fed, are more concerned with core inflation. Despite the anticipated drop in inflation, investors anticipate the Fed will maintain steady interest rates and not implement any cuts in the near future.