Douglas Rising
A note from analysts at Morgan Stanley on Friday said the economy is expected to slow, with core personal consumption expenditures inflation moderating on a sequential basis, especially in the second half of the year.
Economist Diego Anzoategui wrote that he expects sequential growth to be By the end of the year, it was basically in line with the Federal Reserve’s 2% target, and the core PCE inflation rate in the fourth quarter was 2.7% quarter-on-quarter.
The three-month annual rate for core PCE inflation rose to 4.4% in March from 1.6% in December, but economists believe the trend is receding.
Anzoategui believes there are two key assumptions underpinning his call:
Rental inflation slowed in the second half of the year. He explained that the last two reports of the quarterly new tenant rent index showed a faster deceleration in rental CPI/PCE inflation in the second half of 2024.
The re-acceleration of the economy in the first quarter was concentrated in core goods and financial services, where he expected growth to slow. Furthermore, he said “only a few items in core goods and financial services can explain the strength of these two components.” These are clothing, video tapes and computer software. He also said China’s deflation and lower stock returns indicate lower inflation.
Finally, “residual seasonality has played a role in the recent acceleration,” he said. “Seasonality is now worse at capturing seasonal patterns than it was before COVID-19. As a result, core PCE tends to be stronger in the first quarter of the year and weaker in the second half of the year.
