WHAT’S THE LATEST ON INFLATION?
Inflation has continued to cool toward the end of 2023, and some would argue that disinflation is now the prominent trend. Two questions on our minds are whether progress on inflation will stall and whether the Fed’s 2% inflation target will prove reasonable.
The answer to the progress on inflation lies in our own internal metrics. If you’re looking at real-time inflation, we likely already hit the Fed’s 2% inflation target. In new homes data, we see signs of outright deflation, and disinflation, at the very least, in rents. The combination of owners’ equivalent rent and rents is about one-third of the Consumer Price Index (CPI).
Another consideration is our strong domestic currency and what it means for importing goods from countries like Germany and Japan. They now represent cheap goods coming in as a disinflationary force. Unfortunately, a counter to these disinflationary forces may soon be coming on the wage front. The economic effects of the recent jump in union wages haven’t yet filtered through.
As many know, we have our own WisdomTree model for inflation, and it’s proven to be a good predictor of the trend. Our numbers substitute more real-time data for the shelter component of CPI, as shelter is one of the last bastions of high inflation in the official statistics. Chicago Fed President Austan Goolsbee recently said the only thing they have to worry about is shelter inflation, further singing the same tune as Professor Siegel regarding productivity benefits offsetting some inflationary pressures.
Let’s review how our numbers differ from the official model. The official shelter inflation metric for the last 12 months has been 6.5%. Ours is at about 5.1%—basically 1.5 percentage points less than the official metric. When you plug our shelter inflation data into the CPI, headline core inflation looks much closer to the 2% target than the official statistics, which show a 4% core CPI and a 3.1% headline CPI. Our proprietary measures of inflation recently came in at 2.2% for headline and 2.8% for core.
One potential risk to the economy is a housing slowdown. While it has been somewhat resilient so far, some recent signs indicate that possibility. One narrative is that lags in home sales are normal, and we should expect more softness in the next six months. We could see this trending quite positively for the Fed, but it also highlights the risk of the Fed doing too much as fresh data flows its way over the next six months.
Inflation has always been a critical topic, but how we view and discuss it today has to change. One reason for that is the economic impact of globalization; specifically, productivity in key sectors like Artificial Intelligence (AI) can be far more disinflationary. In fact, improvements we’ve seen over the past 20 years across all technology sectors tend to be deflationary (consider the advent and advances of smartphones alone). If AI is able to continue doing the work of less specialized people and save companies money, it will reduce upward pressure on inflation.
Our proprietary measures of inflation recently came in at 2.2% for headline and 2.8% for core.
Figure 1: Trailing 12M Core Inflation: With Alternative Shelter Metrics
CHART TAKEAWAY: As many know, we have our own WisdomTree model for inflation, and it’s proven to be a good predictor of the trend. Our numbers substitute more real-time data for the shelter component of CPI, as shelter is one of the last bastions of high inflation in the official statistics.
Sources: WisdomTree calculations. Core data from Bureau of Labor Statistics (BLS). Alternate measures of shelter include replacing Primary Rent with Zillow Rental Index and BLS Owners’ Equivalent Rent and Case-Shiller Housing Data.
Related Resources
IMPORTANT INFORMATION
Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus containing this and other important information, please call 866.909.9473, or visit WisdomTree.com/investments to view or download a prospectus. Investors should read the prospectus carefully before investing.
There are risks associated with investing, including the possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments in emerging or offshore markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Funds focusing their investments on certain sectors and/or regions and/or smaller companies increase their vulnerability to any single economic or regulatory development. This may result in greater share price volatility.
Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time.
Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. High-yield or “junk” bonds have lower credit ratings and involve a greater risk to principal. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Diversification does not guarantee a profit or eliminate the risk of a loss.
You cannot invest directly in an index. Index performance does not represent actual fund or portfolio performance. A fund or portfolio may differ significantly from the securities included in the index. Index performance assumes reinvestment of dividends but does not reflect any management fees, transaction costs or other expenses that would be incurred by a portfolio or fund, or brokerage commissions on transactions in fund shares. Such fees, expenses and commissions could reduce returns.
This material contains the opinions of the authors, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product, and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein.
Kevin Flanagan, Chris Gannatti, Rick Harper, Jeremy Schwartz, and Jeff Weniger are registered representatives of Foreside Fund Services, LLC.
WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S.