According to research from Morgan Stanley, weaker inflation prints are coming, with leading indicators also pointing to weaker rent inflation in the second half of the year.
The investment bank notes that reflation in the first quarter was narrow and mostly explained by an acceleration in goods and financial services
prices. However, analysts expect both components to decelerate from here.
"We expect deceleration ahead, with slowdown in the monthly pace of core PCE inflation, especially in 2H24," explained the bank. "We see sequential rates broadly aligned with the Fed's 2% inflation target by the end of the year, bringing annual core PCE inflation to 2.7% 4Q/4Q in 2024."
Meanwhile, the bank highlights that core PCE is currently running at 2.8%, 80bp above target, with more than half of the distance to target explained by rents inflation. However, analysts see deceleration coming.
"The New Tenants Rent Index (NTRR) came in weak in 4Q23 and 1Q24 – both prints below 1%Y," said Morgan Stanley. "The NTRR leads rents CPI by about 3 quarters and is a useful explanatory variable in our models."
Meanwhile, the analysis suggests that residual seasonality contributed to the unexpected strength in first-quarter inflation, implying payback in the second half of this year.
In addition, auto insurance inflation, a key component for CPI, is seen starting its descent in the second half of 2024.