Is Inflation Becoming Yesterday’s News?

Aleksey Mironenko

The October CPI report has come and gone, cementing a feel-good quarter for markets. Headline CPI was 0.1% and core CPI was 0.2%. Though the annual headline number is still 7.1%, it’s hard not to breathe a bit of a sigh of relief for several reasons.

US CPI in the second half of 2022 is so far running at an annualized pace of 2.4% (bar chart below).  There’s been a clear step change in the monthly numbers since June. Importantly, in the next four months, readings of 0.6%, 0.6%, 0.8% and 1.2% will exit the annual numbers. If the next four months are 0.4%, we’ll still end March at ~5%, roughly in line with Fed Funds expectations.

Looking beyond headline CPI, the step function remains clear (line chart below). The red line averages PPI, CPI and PE readings and clearly shows not only a deceleration through 2022, but a consistent level below an annualized 4% reading over the last five months.

Finally, CPI and PCE are elevated by shelter costs, which remain stubbornly high at ~0.6%-0.7% and have a large weight. However, the lag in official numbers vs real-time data from Zillow, Apartment List and others makes it clear that we are likely to see shelter disinflation by mid-2023. Shelter inflation contributed 0.2% of the 0.1% CPI reading in November. If shelter inflation were 0%, CPI would have come in at -0.1%; if shelter were -0.3%, you get the idea…

So what will 2023 bring? Next year will likely see a shift in focus to rising unemployment and its effect on corporate earnings. Employment weakness is likely, but if it is countered by productivity growth (as we expect), then the recession may be mild, or delayed to 2024. This will allow the Fed to pause in Q1 and stay there, unless of course employment really deteriorates, in which case we will see rate cuts in the latter part of the year.

This is all good news for investors. Bonds at 5% yields mean there is plenty of room to cut; owning rates and credit can protect the portfolio. Equities are already pricing in a mild recession and will likely rally in both scenarios: mild recession means profits remain above expectations while a more serious recession means Fed pivots aggressively. Fed pause or pivot will drive the USD lower, providing support to gold and the broader commodity complex.  

In short, investors with cash on the sidelines should review their asset allocation and begin to enter back to their desired strategic exposures.


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This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. 

Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

Asset Allocation does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Producer Price Index (PPI) is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time. PPIs measure price change from the perspective of the seller.

The PCE price index (PCEPI), also referred to as the PCE deflator, PCE price deflator, or the Implicit Price Deflator for Personal Consumption Expenditures (IPD for PCE) by the BEA, and as the Chain-type Price Index for Personal Consumption Expenditures (CTPIPCE) by the Federal Open Market Committee (FOMC), is a United States-wide indicator of the average increase in prices for all domestic personal consumption. It is benchmarked to a base of 2012 = 100. Using a variety of data including U.S. Consumer Price Index and Producer Price Index prices, it is derived from the largest component of the GDP in the BEA’s National Income and Product Accounts, personal consumption expenditures.

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