Skip to main content

Disinflationary wave is building

The Fed looks set to deliver a third consecutive 75bp rate hike tomorrow, but if we’re right that inflation will fall back soon, officials will quickly pivot to much smaller hikes. The continued drop in gasoline prices and easing food inflation will weigh on headline CPI over the next month or two and, despite the larger than expected 0.6% rise in core prices in August, there are mounting signs of disinflation there too. Supply shortages have normalised, with our product shortages indicator now suggesting that core goods inflation could fall back to 2% before the end of the year, from 7% in August. (See Chart 1.) Core services inflation is being fuelled by the continued rapid increase in rents, but the latest private sector measures suggest that inflation for new leases is slowing markedly. What’s more, there are broader signs of deflation in services from falling airfares to hotel rates, while the plunge in longer-term inflation expectations has markedly reduced the risks of a price-wage spiral. The upshot is that we expect to see clearer and more convincing signs of a drop back in inflation in the CPI figures soon.

Become a client to read more

This is premium content that requires an active Capital Economics subscription to view.

Already have an account?

You may already have access to this premium content as part of a paid subscription.

Sign in to read the content in full or get details of how you can access it

Register for free

Sign up for a free account to gain:

  • Unlock additional content
  • Register for Capital Economics events
  • Receive email updates and economist-curated newsletters
  • Request a free trial of our services

Get access