Inflation to drop further in 2024 but stay above 2% target
Will inflation ease off in 2024? Yes, but it will likely remain above the U.S. Federal Reserve’s 2% target, according to central bank economists and private-sector forecasters.
The Survey of Professional Forecasters (SPF) predicts a 2.5% core Consumer Price Index (CPI)* and 2.4% core Personal Consumption Expenditures (PCE)* in 2024. The Wall Street Journal survey shows similar results. According to Statista, inflation will decrease to 2.3% next year and drop further to 2.1% in 2025 and to 2% in 2026.
On the other hand, Morningstar projects inflation will average 1.8% from 2024 to 2027, undershooting the Fed’s 2% inflation target.
“We expect inflation’s effect to fade through the end of 2023 and into 2024 after it reached its highest level in over 40 years in 2022,” Morningstar reported, noting the decrease will be driven by the unwinding of price spikes owing to supply chain resolutions, along with a moderated pace of economic growth resulting from the Fed’s tightening.
Deloitte outlines its U.S. inflation prediction into four potential scenarios: a soft landing, a bumpy landing, a hard landing and a crash landing.
In case of a soft landing, inflation reverts to the Fed’s 2% target as supply chain disruptions settle in 2023 and consumer demand for services versus goods normalizes to pre-pandemic levels. The Fed’s policy is effective in reducing inflation without leading to a recession.
In a bumpy landing, inflation slowly falls but lingers above 2% over the next few years as supply chain disruptions ease but the labor supply remains somewhat constrained. Firms and consumers adjust, and growth continues, although unevenly across industries.
In a hard landing, inflation falls below the 2% target because of overly aggressive Fed monetary policy and a faster than expected resolution of supply chain disruptions, coupled with diminished consumer demand as so-called pandemic savings are spent, resulting in a drop in prices across goods and services.
In the final scenario, a crash landing, inflation remains high (6%) as supply shocks from geopolitical conflicts disrupt supply chains and the rapid rebound of China’s economy results in higher demand in energy markets. Entrenched inflation expectations and a wage-price spiral call for a strong response from the Fed.
Latest data on inflation
On Dec. 13, the Fed held the benchmark overnight borrowing rate steady in the 5.25% to 5.5% range and said it anticipated three rate cuts in 2024.
The central bank noted that inflation “has eased” over the past year and lowered its 2024 inflation forecast to 2.4% from 2.6%.
Inflation dropped faster in 2023 than initially expected. Data released by the Bureau of Labor Statistics on Dec. 12 showed that prices rose 3.1% in November over the year before, and a 0.1% increase from October. Though higher than normal, it is a vast improvement since the CPI peaked at 9.1% in June 2022.
Starting in March 2022, the Fed raised its key rate 11 times to a 22-year high in an attempt to cool an overheated post-pandemic economy that contributed to the highest inflation in more than 40 years. Higher rates mean more expensive borrowing costs for businesses and consumers.
Inflation in Puerto Rico
Puerto Rico’s inflation rate, which is expected to be at 3.2% at the end of this quarter, should drop to 2.6% in the first quarter (Q1) and Q2 2024 and finish at 1.8% by Q3 2024, according to Trading Economics’ global macro models and analyst expectations.
Inflation on the island decreased to 2.7% in October from 3.3% in September 2023, according to the latest data released by the Puerto Rico Economic Development Bank.
Statista predicts Puerto Rico’s inflation closing at 2.89% this year, falling to 1.15% in 2024 going back up to 1.91% in 2025.
Inflation hits consumers everywhere, but those in Puerto Rico face deeper financial struggles than consumers on the U.S. mainland, according to a recent report by the Consumer Financial Protection Bureau (CFPB) based on the National Financial Capability Study from the FINRA Foundation and the CFPB’s own research.
Financial well-being in Puerto Rico lags behind the rest of the U.S., the CFPB reported. The share of adults with high or very high financial well-being is significantly lower in Puerto Rico at 26.3% versus 35.6% in the rest of the U.S., according to the CFPB Financial Well-Being Scale, which measures people’s ability to have financial security and financial freedom of choice in the present and in the future.
Puerto Rican households experience several financial hardships: an annual household median income that was just below $22,000 in 2021, 1.4 million people living below the federal poverty line, and 13% of the population without medical insurance, among other challenges.
After decades of declines, fewer Puerto Rico-based institutions remain to serve the island, the CFPB reported. Residents of Puerto Rico have limited financial product and service choices compared to the 50 states.
In Puerto Rico, 12% of households lack checking, savings, money markets or CD accounts, compared with 4.5% on the mainland, and 40% don’t have a credit card, versus 20% on the mainland, according to FINRA and the FDIC National Survey of Unbanked and Underbanked Households.
Recession potential
In late 2022 and into the second half of 2023, many forecasters projected U.S. recession in 2023 or 2024. While recession no longer seems likely, that does not mean the risk has disappeared.
In the November SPF, private forecasters estimated a 40% chance of negative real gross domestic product (GDP) growth in the first half of 2024 and a 36% probability in the second half. These probabilities are above the 15% historical average chance of recession, the Federal Reserve Bank of St. Louis reported.
The risk of recession likely reflects several factors, the bank said, including whether the Fed’s current monetary policy stance is high enough to bring inflation back to 2% in a timely manner, geopolitical concerns (wars in the Middle East and Eastern Europe, both large oil-producing regions), and concerns about default and delinquency rates across several loan categories due to higher interest rates.
A U.S. recession could negatively impact Puerto Rico’s economy, which has been in recession for nearly 20 years.
Advice to companies
Budgets for next year should reflect inflation that is still running fairly high. If the forecasts are correct, inflation will be significantly lower by year’s end.
Deloitte provides a course of action for each scenario:
In a soft landing, companies should prepare for growth by focusing on innovation, development and expansion into adjacent markets. Deloitte advises pricing strategies that consider new consumer expectations, optimizing for growth, market share and resiliency.
In a bumpy landing, businesses should focus on mitigating risks to input costs, especially those related to fuel and transport, by maneuvering away from sources that are directly affected by the wars. Shift talent strategies to increase employee loyalty and reduce attrition, and optimize for stability and consolidation.
In a hard landing, consumer spending is likely to decrease, so brands should focus on marketing and sales efforts. Deloitte recommends maximizing delivery and fulfillment capabilities through process improvements, automation and artificial intelligence; considering finance options to capture reduced interest rate opportunities; and optimizing for process efficiency, innovative sales and marketing initiatives.
In the last scenario, a crash landing, companies should focus on improving their resiliency by restructuring their supplier relationships and partnerships. Consider options to increase operating efficiency and protect liquidity; de-risk exposure to geopolitical shocks for both materials and market access; and optimize risk identification and mitigation.
In addition, Deloitte said, business leaders should consider the following strategies, regardless of which scenario plays out:
- Develop robust cost analytics capabilities: Analyze major drivers of spending to understand trends, allocate funds toward strategic priorities and reduce nonessential consumption.
- Optimize workforce delivery models: Revamp work performance models through automation, off- and near-shoring, and rationalization of roles.
- Build a strategic market sensing function: Develop internal capability to monitor how the future is evolving, especially regarding evolving customer needs and pricing opportunities.
- Realign real estate strategy: Take advantage of expected changes in real estate prices and COVID-driven adaptations to support business objectives.
- Diversify supply chains: Minimize dependence on single countries or regions to develop hedges that enhance resiliency in all conditions.
*The Consumer Price Index (CPI) measures changes in out-of-pocket expenditures for urban households. The Personal Consumption Expenditures index (PCE) measures changes in goods and services consumed by households and nonprofit institutions serving households.
