Monetary Policy & Inflation | US
Inflation Slowdown to Accelerate After Q1
- By Dominique Dwor-Frecaut
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- 8 minutes read
Summary
• Consensus forecasts see end-2022 YoY core PCE at 3.6% against 2.6% in the FOMC December SEP. I think the Fed is more likely than consensus to be right for the following reasons:
o Though likely to pause in Q1, the switch from goods to services consumption has finally started and could trigger a disinflationary chain reaction with inventories demand and logistics.
o Services inflation could slow alongside falling wage growth as labour market slack is likely to trough in Q1.
• Given currently high inflation and low unemployment, the Fed will likely remain hawkish in Q1-Q3, with five 2022 hikes in the dot plots. Only in Q4 will the dovish pivot take place, with the Fed staying on hold and lowering the 2023 dots plot to reflect lower inflation.
Market Implications
• Curve flattening in Q1-Q3 followed by curve steepening in Q4.
Summary
• Consensus forecasts see end-2022 YoY core PCE at 3.6% against 2.6% in the FOMC December SEP. I think the Fed is more likely than consensus to be right for the following reasons:
o Though likely to pause in Q1, the switch from goods to services consumption has finally started and could trigger a disinflationary chain reaction with inventories demand and logistics.
o Services inflation could slow alongside falling wage growth as labour market slack is likely to trough in Q1.
• Given currently high inflation and low unemployment, the Fed will likely remain hawkish in Q1-Q3, with five 2022 hikes in the dot plots. Only in Q4 will the dovish pivot take place, with the Fed staying on hold and lowering the 2023 dots plot to reflect lower inflation.
Market Implications
• Curve flattening in Q1-Q3 followed by curve steepening in Q4.
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