Dive Brief:

• Inflation may be slowing across a wide front as demand declines, supply chain disruptions fade and money supply growth tapers off, Fannie Mae said in a report.
• The unexpectedly low 7.7% year-over-year increase last month in the Consumer Price Index (CPI) indicated that “inflationary pressures may be easing broadly,” Fannie Mae said, noting lower health care costs and a 2.4% decline in used auto prices. “Both of these trends are likely to continue,” Fannie Mae said, adding “inflation may have peaked.”
• Gross domestic product — after expanding at a 2.6% annualized rate during the third quarter — will likely shrink 0.5% during the current quarter as a brief surge in exports dies out, Fannie Mae said. Tightening monetary policy and faltering global growth will likely trigger a “modest recession” during the first quarter, culminating in a 0.6% contraction in GDP for 2023.

Dive Insight:

Despite slowing inflation and signs of sagging economic growth, Federal Reserve policymakers in recent months have affirmed their pledge to keep raising the federal funds rate to rein in demand and achieve a sustained decline in price pressures.

“Given the high level of inflation, restoring price stability remains the number one focus of the FOMC,” Cleveland Fed President Loretta Mester said Tuesday, referring to the policymaking Federal Open Market Committee.

“We’re committed to using our tools to put inflation on a sustainable downward trajectory to 2%,” Mester said, according to Bloomberg News.

Along with better-than-anticipated CPI data, wholesale prices rose 8% in October on an annual basis compared with an 11.7% year-over-year increase in March, according to the Labor Department.

“Inflation data reflect steady normalization of supply friction amid softening demand,” Moody’s Investors Service said, while predicting a decline in consumer spending and economic growth.

“The 0.1% month-to-month decline in October industrial production confirms that real economic activity is slowing amid gradually weakening goods demand,” Moody’s said in a report.

Consumer spending, which accounts for nearly 70% of economic growth, will probably sag in coming months because of “high interest rates, slower economic growth, diminishing saving buffers and less certain job prospects,” according to Moody’s.

In turn, retailers will likely cut prices in the face of mounting inventories, Moody’s said. “Overall conditions will add to slowing inflation momentum in the months ahead.”

In another sign of ebbing price pressures, annual growth in the money supply has fallen in recent months, according to Fannie Mae.

“This points to a decelerating inflationary trend over the next year,” Fannie Mae said, while predicting the economy will grow 2% in 2024.