The resilience of consumer spending is keeping hopes of a soft landing alive. Although GDP growth looks to have slowed in the fourth quarter, and most leading indicators of recession are flashing red, solid retail sales and a jump in vehicle sales suggest consumption growth will accelerate to 3% annualised. Nevertheless, even if the real economy continues to hold up better than we had been anticipating, we still think the fall in core CPI inflation in October has much further to run. Easing shortages, plunging transportation costs and the stronger dollar will drive core goods inflation sharply lower, while the slowdown in private-sector measures of rents and a further easing of labour market conditions should see services inflation also slow soon. We expect a mild recession next year to add to those disinflationary forces, but core inflation is likely fall sharply regardless, which we think will convince the Fed to begin cutting interest rates again by the end of next year.
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