Inflation Outlook for the Federal Reserve’s Target


According to David Kelly, Chief Global Strategist at JP Morgan Asset Management, inflation is expected to fall below the Federal Reserve’s 2% annual target by late next year.

Consumer Prices Rise, Surpassing Recent Lows

Based on the release of the monthly consumer-price index, consumer prices rose again in August, reaching a yearly rate of 3.7%. This marked the largest increase in 14 months and surpassed the recent low of 3% set in June (see chart). The impact of the Federal Reserve’s rate hikes played a role in this upward trend.

Energy Prices Propel Price Pressures

The catalyst behind the increased price pressures in August was a significant surge of approximately 30% in energy prices this quarter. Eric Winograd, Director of Developed Market Economic Research at AllianceBernstein, attributed this rise to the surge in energy prices.

Focus on Supply Concerns for Crude Oil

West Texas Intermediate Crude, the U.S. benchmark, was trading near $88.58 a barrel on Wednesday. Traders have been closely monitoring supply concerns following decisions by Saudi Arabia and Russia to cut crude supplies through year-end. It is worth noting that in May, WTI was trading at a low for the year, below $65 a barrel.

Keep in mind that these insights and projections are from David Kelly and Eric Winograd, both reputable experts in their respective fields.

Federal Reserve Holds Interest Rates

The Federal Reserve is expected to refrain from raising interest rates next week, despite a recent upside surprise in inflation. In an emailed commentary, economist Winograd stated that while the inflation rate is sticky, he believes the Fed will maintain its current stance due to resilient growth. However, he anticipates the committee will continue to have a tightening bias, possibly indicating another rate hike later this year.

In July, Federal Reserve officials already increased the central bank’s policy rate to a range of 5.25%-5.5%, reaching its highest level in 22 years. Nevertheless, JP Morgan’s Kelly suggests that higher gasoline prices could counteract inflation by cooling consumer spending. This potential slowdown may contribute to slower growth and lower inflation in 2024.

Despite these factors, U.S. stocks were mildly optimistic following the Consumer Price Index (CPI) update. The Dow Jones Industrial Average (DJIA) was up by 0.1%, the S&P 500 index (SPX) rose by 0.3%, and the Nasdaq Composite Index (COMP) increased by 0.6%, according to FactSet data.

Oil Prices Impacting Inflation Outlook

According to renowned economist Winograd, despite a gradually decelerating core inflation, the current rise in oil prices will hinder significant progress in cooling headline inflation throughout the year. This challenging process will undoubtedly heighten the vigilance of the Federal Reserve.

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