The Amazing Disappearing Inflation and Its Impact on Household Income

As we showed previously, inflationary pressures follow the change in the growth rate of money supply by six to eighteen months. Recognizing that relationship is how we predicted that the rate of inflation would fall precipitously during 2023.

While the pace of the reduction in inflationary pressures may slow in 2024, the year-over-year rate of inflation should continue to decline over the course of this year. We can say this because of the lagging effects of monetary policy shifts. For example, while Personal Consumption Expenditures (PCE) and Core PCE, the U.S. Federal Reserve’s preferred inflation measure that strips out the impact of volatile food and energy prices, are up 2.40% and 2.85% respectively over the last 12 months, those rates reflect the greater inflationary pressures impacting the economy several months ago.

Unless recent trends, such as a slowing in demand growth and/or money growth quickly reverse, it will become increasingly clear that the U.S. Federal Reserve has already done enough to achieve their 2% average rate of inflation goal.

PCE, Core PCE & Hourly Earnings YOY%

We view this as a very strong positive for U.S. households as wage growth persists at above-average historical rates that reflect the tight labor market. In fact, average hourly earnings have been growing faster than inflation for some time now as it has outpaced the rate of both PCE and Core PCE inflation. We expect that trend to endure as inflationary pressures continue to decline and wage growth persists. Persistent wage growth and falling inflation are important positives for the U.S. economy over the year ahead.


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