Market Data 
- The recent rebound in inflation is about to end, according to a note from Raymond James.
- The firm highlighted four reasons why rising prices should reverse, including an expected slowdown in economic growth.
- Raymond James’ CIO also explained why he still sees the Fed cutting interest rates three times in 2024.
A string of back-to-back-to-back inflation reports that were stronger than expected has upended market expectations of what path the Federal Reserve might take this year.
At the start of the year, markets expected as many as seven interest rate cuts from the Fed in 2024, but that number has dwindled to less than two after the higher-than-expected March inflation report.
But according to Raymond James chief investment officer Larry Adam, inflation is set to reverse lower and the Fed is going to cut interest rates at least three times this year.
These are the four reasons why Adam is confident that the recent uptick in inflation is not the start of a new trend like it was in the 1970’s.
1. Economic growth should begin to temper
While the economy should continue to avert a recession, it is unlikely to grow at such a strong rate like it did over the past two years, according to Adam.
Adam pointed to small business optimism falling to its lowest level since 2012. On top of that, the percentage of businesses reporting weak sales has jumped to its highest level in almost three years.
Additionally, the recent rebound in inflation during the first three months of 2024 has also led to a rebound in interest rates, with mortgage rates back above 7% and credit card interest rates hovering near record levels. Those high interest rates should dampen spending.
“This, plus a softening labor market, dwindling savings, high credit card balances and rising delinquencies suggest the momentum in consumer spending should start to slow, but not collapse. This should lead GDP to falling below 1% in the next two quarters,” Adam said.
If the economy slows, then so should inflation, and it should give the Fed more confidence to begin cutting interest rates.
2. Labor conditions will slowly ease
While monthly jobs reports have been solid, “there are cracks forming that point to weaker labor conditions ahead,” Adam said.
Employment subsectors in the ISM Manufacturing and ISM Services indices have contracted recently, and small businesses have pulled back their hiring plans in recent months.
“In the latest NFIB survey, small business hiring plans fell to the weakest level since May 2020,” Adam said, adding that temporary help services have been trending lower for over a year.
“While significant job losses are unlikely, these indicators suggest the labor market is likely to soften, keeping a lid on wages and dampening consumption,” Adam said.
3. Leading indicators show falling prices
Forward-looking metrics that measure inflation suggest that the overall downward trend remains intact, according to Adam.
The strategist highlighted that the prices paid subsector of the ISM Services Index dropped to its lowest level since March 2020, suggesting that services prices should begin to fall. Meanwhile, goods prices should stay depressed as supply chains continue to normalize.
“This, combined with additional Amazon ‘selling events’ and slowing demand for motor vehicles point to further discounting in the goods space and leaves us confident that a material acceleration is unlikely,” Adam said.
4. Real-time inflation metrics show a sharp decline
While official government metrics show stubbornly high rent and used vehicle prices, real-time measures show considerably lower prices. The government metrics should eventually catch-up to the real-time metrics of prices, suggesting further disinflation ahead.
“If we replaced these components in the CPI with the real-time metrics, CPI would be less than 2% on a YoY basis! The point is: there should be plenty of disinflation in the pipeline as CPI converges with some of these more real-time metrics,” Adam said.
