We expect inflation to move lower throughout the year, but progress will be more of a grind ahead. Slower growth in goods prices has accounted for half of the decline in CPI inflation over the past year. Recent gains in oil prices and agricultural commodities, however, are turning energy and food from a significant tailwind to disinflation over the past year and a half to at least a modest headwind ahead. We have raised our forecast for prices of energy commodities, although the risk of additional near-term adjustments lie to the upside given the recent momentum of oil prices. Meantime, supply chain strains are no longer easing. Even before the latest logistical challenges stemming from the conflict in the Red Sea or collapse of the Key Bridge in Baltimore, supply chain pressures according to the New York Fed's barometer had returned to a roughly neutral stance.
With goods disinflation petering out later this year, services prices will need to slow further to keep inflation on its downward path. Shelter inflation still looks poised to lead the charge. Although monthly readings of primary shelter have been stuck around 0.4-0.5% since last spring, the steep decline in “spot” rents implies a step down to 0.2-0.4% through the rest of the year. We expect primary shelter to slow from a 5.9% year-over-year rate in February to 4.0% in December, which would reduce its contribution to headline CPI by 0.6 points and help to narrow the unusually large wedge between CPI and PCE inflation. - Wells Fargo
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