Wall Street’s 2024 inflation surprise is coming into focus

With 2023 wrapping up, Wall Street has started to plan for 2024.

And with this planning we’ve seen emerge a key consensus view that will shape much of the discussion about the year ahead — inflation continuing to fall.

In an interview with the Financial Times published Monday, Chicago Fed President Austan Goolsbee said it was “undeniable” that inflation’s drop is a trend rather than a one-month blip. Patrick Harker, president of the Philadelphia Fed, said Monday in a speech there is “steady disinflation underway,” adding that he expects inflation to fall below 3% next year.

Harker and Goolsbee are both voting members of the Federal Open Market Committee, the Fed committee that votes on monetary policy changes.

Chicago Fed President Austan Goolsbee gestures as he heads into the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyo., Aug. 24, 2023. (Ann Saphir/REUTERS)

The Federal Reserve’s latest inflation forecast published in September said core PCE — the central bank’s preferred inflation reading — will likely finish next year at 2.6%, down from 3.7% at the end of this year. As of August, core PCE inflation was running at 3.9% annually.

And last week, the September CPI report showed headline inflation stood at 3.7% annually, unchanged from August, as “core” prices, which strip out food and energy, rose 4.1% over the prior year. The Fed targets 2% inflation.

At least one commentator referred to this report as “reassuringly uneventful” and an extension of the disinflation narrative taking hold in markets.

In a note to clients on Monday, RBC strategist Lori Calvasina raised her expectations for corporate profits over the balance of this year and next. And partly driving this view is a continued easing of inflation pressures.

“Our 2024 forecast assumes a significant moderation in inflation, easing of interest rate pressures in the back half of the year, and sluggish GDP and industrial production forecasts,” Calvasina wrote. “This is the current consensus view among economists, but may be revised as 2024 outlooks are refined.”

Calvasina said the firm’s view on inflation is that inflation as measured by the Consumer Price Index (CPI) “will fall to the low 2% range” next year, dragging down revenue but helping ease interest rate pressures in the back half of 2024.

But data late last week from the University of Michigan revealed consumers aren’t yet sold on this disinflationary trend sticking around.

The university’s initial read on consumer sentiment in October showed year-ahead inflation expectations rose to 3.8% from 3.2% in September. This comes as gas prices have risen in recent months with the price of oil reaching $93 a barrel in late September.

Of course, consumer views on the economy can be fickle and particularly sensitive to changes in gas prices. And this near-term discrepancy between the “Wall Street” and “Main Street” view of the economy is, for now, just that: a near-term discrepancy.

This divide, however, offers a reminder of how the Wall Street consensus view for 2023 turned out to be wrong. Calls for a recession in the first part of the year accompanied by lower stock prices were instead met by a durable economic expansion and an AI craze that pushed markets higher.

A strong labor market and steady consumer spending have buoyed the economy in 2023, postponing a recession that many forecasters rolled to next year.

All of this means that the specter of inflation, consumer spending, and the labor market each rolling over still hangs in the air to haunt 2024 — and Wall Street forecasts.