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Inflation remains high, keeping pressure on the Federal Reserve
to raise interest rates forcefully.
In twelve-month changes, overall Consumer Price Index (CPI)
inflation was 8.2% in September and core CPI inflation rose to a
four-decade high of 6.6%. Based on detailed data in the CPI, we
estimate that the core personal consumption expenditures (PCE)
price index rose 5.1% over the 12 months through September.
Rent inflation, which has large weights in both CPI and PCE
inflation, averaged approximately 9% over the last three months,
more than double the pre-pandemic norm. New agreements reflect a
softening in rents, foreshadowing a reduction next year in rent
inflation in the CPI, which is based on average rents (both new and
existing agreements). That will contribute to an eventual reduction
in core inflation.
The disinflationary impulse from lower rent inflation is a few
quarters into the future and, by itself, will not be sufficient to
support a full reduction of inflation to the Fed's 2% target. The
Fed will be forced to raise interest rates to support tight
financial conditions and a softening in demand in pursuit of lower
inflation. The Federal Open Market Committee (FOMC) will respond on
Nov. 2 with another super-sized rate hike of 75 basis points,
bringing the target for the federal funds rate to a range of 3¾% to
4%.
Additional rate increases at subsequent meetings in December and
early next year are virtually assured. We expect that declines in
core inflation and indications of softening in labor markets will
prompt the Fed first to slow and then to pause rate hikes next
spring after lifting the target funds rate to a range of 4½% to
4¾%.
Mild recession likely
Decisions on interest rates will be influenced by incoming data
on inflation and other developments pertaining to the inflation
outlook, so there are risks to the forecast for Fed interest-rate
policy. The likelihood of a recession sparked by Fed tightening
will not be enough to keep the Fed from continuing to raise
interest rates as it strives to lower inflation to its 2%
target.
We expect the US to fall into a mild recession beginning in the
fourth quarter, when we expect GDP to contract at a 1.0% annual
rate. This would follow (our estimate of) a 2.4% increase in the
third quarter when a large increase of net exports contributed
approximately 3.0 percentage points to GDP growth.
We expect a substantially smaller growth contribution from net
exports in the fourth quarter, alongside declines in residential
and business investment and meager growth of real consumer
spending. We project that GDP will continue to decline during the
first half of next year, resulting in a cumulative decline over 3
quarters of 1.1%.
This week's US economic releases:
Industrial production (Oct. 18): We estimate
10.6 million units for vehicle assemblies.
New residential construction (Oct. 19): We
estimate 1,480 thousand units for housing starts in September, down
from 1,575 thousand units in August. This would leave starts in
line with what has been a weakening trend this year, as soaring
mortgage rates have weighed on residential construction activity.
We estimate 1,570 thousand units for housing permits in September,
up slightly from 1,542 thousand units in August.
Existing home sales (Oct. 20): We estimate
4,640 thousand units in September, down from 4,800 thousand units
in August. This would continue a weakening trend, as is evident in
several other housing market indicators.
Leading economic index (Oct. 20): A decline
would mark the seventh consecutive monthly drop and would be
consistent with our view that the US economy is about to tip into
recession.
Posted 17 October 2022 by Akshat Goel, Senior Economist, US Macro and Consumer Economics, S&P Global Market Intelligence and
Ben Herzon, Executive Director, Research advisory specialty solutions, S&P Global Market Intelligence and
Ken Matheny, Executive Director, Research Advisory Specialty Solutions, S&P Global Market Intelligence and
Lawrence Nelson, Senior US Economist, Research Advisory Specialty Solutions, S&P Global Market Intelligence
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
