With December’s Consumer Price Index Summary set to be released shortly by the Bureau of Labor Statistics, Wall Street is turning its attentions once again to what the final CPI print of 2022 will hold—and, by extension, what the Federal Reserve’s next interest rate hike will be.
The Wall Street consensus is that consumer price inflation is likely to continue the downward trend of the last half of 2022.
On Thursday, the Labor Department will release the consumer price index for December. Analysts are hoping it will reinforce November’s positive trendline of receding inflation with a year-over-year number of 6.7% compared to 7.1% in November. Expectations are that the core rate excluding food and energy will be 5.6% annually, down from 6%.
With November’s consumer price inflation percentage already below where it was in January 2022, and roughly where it stood in December of 2021, a half-percentage point decline in the headline inflation metric would mean that inflation actually fell during calendar 2022—the clearest endorsement yet of the Fed’s campaign to crush inflation by crushing the economy.
That consumer price inflation has been heading south in recent months is undeniable, at both the headline figure and the “core” inflation gauge.
Certainly the Cleveland Federal Reserve’s inflation nowcast aligns with the consensus view that inflation is on the decline, with headline consumer price inflation projected to be 6.6%, and core inflation projected to print at 5.8%.
Somewhat counterintuitively, the decline in consumer price inflation has come as the economy has presumably grown significantly, posting a 3.2% growth rate in the third quarter of last year after having shrunk in both the first and second quarters.
For the fourth quarter, the Atlanta Federal Reserve’s GDPNow nowcast is projecting even more growth, printing at 4.1% as of Tuesday.
The prevailing economic wisdom holds that inflation tends to increase as GDP grows due to rising demand, and falls when GDP contracts, due to falling demand. Certainly that has been the case over the past two years.
With nominal GDP forecast to increase by even more than in third quarter 2022, one should expect to see inflation rising, with increased demand bumping up against constrained supply across the economy. Instead, Wall Street is expecting inflation to fall despite rising demand.
This view of inflation presumes that the economy is in fact growing, and that demand is therefore rising. As I detailed yesterday, despite last week’s optimistic (and phony) jobs report, there continue to be multiple signs the economy has been contracting, and that the US has been in a recession since before the start of 2022.
Additionally, despite the “official” GDP estimates for 2022, the roller coaster decline in shipping rates, as measured by the Baltic Dry Index (as well as its various subindices), is a potent argument for declining demand in 2022, which should definitely explain the drop in headline inflation.
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