Why US Inflation Will Likely Fade

Orren  Klachkin, lead US economist at Oxford Economics, issued the following analysis on inflation on June 20. 

Key points:

• We expect downward pressure from multiple factors to push inflation lower by the end of 2023. Weaker demand and reduced supply constraints are poised to ease stress in goods and services. We forecast that headline and core CPI inflation will average around 3.5% and 4.5% in Q4 2023, respectively, and continue to moderate in 2024. Our inflation forecast is a bit higher than the consensus, owing largely to sticky services inflation, which we don't think will fade quickly over the next 18 months.
• History shows that recessions tend to lower inflation, and despite the unique nature of this cycle, we expect the upcoming downturn to be no exception. While a mild recession might start later than the Q3 timing that we expect, we're confident that tighter lending standards, elevated interest rates, and the Fed's commitment to lower inflation will eventually trigger a recession
• Our proprietary tracker shows that supply chain stress is steadily receding, and conditions look set to normalize by around the end of the year. Inflation for goods most exposed to supply chains has fallen sharply. Alongside improving supply chain conditions, goods inflation will fall because goods demand is softening.
• Services inflation has proven to be stubborn, but its two key drivers – elevated shelter inflation and a strong labor market – will weaken in H2. Market-based measures of rent have already rolled over. Leading indicators point to a weaker labor market ahead.
• Inflation will fall because strong base effects are poised to drop out of the inflation calculation as we progress through the year. Softer month-over-month increases than those recorded from 2020 to 2022 will lead annual inflation rates to fall from their current readings.

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