Actual and Forecast Year-Over-Year Change in CPI and Core CPI (2023-2025)

 

The combined analysis of actual and forecasted data for CPI and Core CPI provides insight into the inflation dynamics from late 2023 through 2025. Here are the key observations and analysis:

1. Trends in Actual Data (2023-2024):

• Declining CPI: From October 2023 through September 2024, the Year-over-Year percentage change in CPI shows a steady decline, starting from around 3.25% in October 2023 to approximately 2.41% by September 2024. This decline indicates a cooling in overall inflation, likely influenced by reduced pressures from volatile sectors such as energy.
• Core CPI's Slowdown: Core CPI, which excludes food and energy, also exhibits a gradual decrease over the same period, from about 4.02% in October 2023 to around 3.26% in September 2024. The more modest decline in Core CPI suggests that inflation in core areas such as housing, healthcare, and services has been more persistent, even as broader inflationary pressures ease.

2. Forecasted Data Analysis (2024-2025):

• CPI Forecasted to Turn Negative: The forecast indicates that CPI will continue to decline throughout 2025, eventually entering negative territory by mid-2025. This suggests the possibility of deflation, where overall prices could decrease compared to the previous year. Deflation could be driven by factors such as lower demand, a decrease in commodity prices, or the impact of tightening monetary policies.
• Core CPI Remains Positive but Declines: While Core CPI is also expected to decrease, it remains positive throughout the forecast period, though it declines from around 3.28% in October 2024 to about 2.29% by September 2025. This suggests that underlying inflation in areas like housing and services remains more resilient, even as headline CPI trends downward.

3. Implications of the Divergence Between CPI and Core CPI:

• Potential Deflation Risks: The negative trend in overall CPI signals potential risks of deflation, which can be concerning for economic growth. Deflation can reduce consumer spending and investment as people may expect further price declines, potentially leading to slower economic activity.
• Sticky Core Inflation: The persistence of positive Core CPI suggests that, even as general prices decline, the cost of living in areas like rent, healthcare, and other services remains elevated. This could mean that while energy and food prices are stabilizing or falling, core expenses are slower to adjust.

4. Economic Outlook and Policy Considerations:

• Policy Implications: The declining trend in both CPI and Core CPI aligns with the effects of higher interest rates aimed at curbing inflation. However, if CPI enters negative territory while Core CPI remains positive, policymakers may face a dilemma: balancing the risk of deflation with the need to keep core price stability.
• Consumer Impact: For consumers, a decline in CPI might bring some relief in the form of lower prices for goods like energy and durable goods. However, the sustained positive Core CPI means that essential services like housing and healthcare may not experience the same price relief, continuing to impact household budgets.

5. Potential Scenarios for 2025:

• Soft Landing: If the economy successfully balances the cooling of general inflation with sustained but moderate core inflation, it could achieve a soft landing. This scenario would involve slowing growth without tipping into recession.
• Risk of Recession: On the other hand, if deflation in general CPI leads to a significant reduction in demand, it could increase the risk of a recession. The steady decline in both CPI and Core CPI indicates that a careful approach is needed to manage monetary policies and maintain economic stability.

Conclusion:

The analysis shows a clear trend of decelerating inflation as the economy moves into 2025, with a potential transition toward deflation in overall CPI. Core inflation remains more resilient, highlighting the continued challenges in managing the cost of living in essential areas. The forecasted divergence between CPI and Core CPI suggests that while general price pressures may ease, the broader economic picture will require careful management to avoid adverse effects like deflation or recession.