Inflation: Subject To Change

Quick read:

  • The deceleration of the core PCE (Personal Consumption Expenditures) inflation rate in the second half of 2023 catalyzed a pivot in monetary policy messaging and shifted market pricing for the path of policy rates in 2024.
  • However, the propensity for core PCE to be revised upward and the growing wedge between core PCE and other measures of inflation (like the core Consumer Price Index) makes us hesitate to read too much into this initial estimate of the data.
  • In our tactical multi-asset portfolios like the BlackRock Tactical Opportunities Fund, we remain short duration and have been reducing exposure to US Treasuries versus non-US government bond markets.

One piece of data I will be watching closely is the scheduled revisions […]. Recall that a year ago, when it looked like inflation was coming down quickly, the annual update to the seasonal factors erased those gains. In mid-February, we will get the January CPI report and revisions for 2023, potentially changing the picture on inflation. My hope is that the revisions confirm the progress we have seen, but good policy is based on data and not hope. – Fed Governor Waller “Almost as Good as it Gets…But Will It Last?”, January 16, 2024

Inflation declined much more quickly than expected in 2023. The Fed’s preferred inflation measure, core PCE, appears to be running at close to the 2% target in the second half of last year. This catalyzed the shift in monetary policy messaging in December 2023, and markets have subsequently gone on to price more than five interest rate cuts for 2024. However, as we analyze the totality of the US inflation and growth data entering 2024, we share the caution voiced by Fed Governor Waller in his recent speech.