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Quarterly economic outlook - Q4 2023

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2024 SEI ® Data as of 12/31/2023 unless otherwise indicated. 8 There are many ways to "slice and dice" inflation statistics, which we show for the U.S. in Exhibit 11. Consumer prices (CPI-U all items), the personal-consumption expenditures (PCE) price index and even the core "sticky" CPI less shelter index 2 have decelerated to around the 2.6%-to-3.1% mark. By contrast, the median CPI 3 is still above 5%. The so-called trimmed mean CPI, which excludes the CPI components that show the most extreme monthly price changes, is still above 4%. The core PCE price index, the inflation measure explicitly preferred by most Fed decision-makers, is now approaching 3%, about half a percentage point lower versus where we thought it might end the year. Exhibit 11: Pick your favorite inflation rate Source: U.S. Bureau of Labor Statistics, Federal Reserve Bank of Cleveland, SEI. As was the case at the end of 2022, we maintain our position that inflation will not fall all the way back to central banks' target without some amount of pain. We think that economies globally will need to endure a prolonged period of subpar growth or outright contraction before labor markets can ease enough to exert enough downward pressure on wages to be consistent with a sustained 2% inflation rate. While a drop in inflation from the levels of the past two or three years is not surprising, we believe the most recent months' reading of overall inflation underestimates the longer-term trend. This seems especially the case in the U.S., where the normalization of supply chains and shifts in consumer purchasing patterns have put downward pressure on goods prices that have caused an outright deflation in durable goods prices. Exhibit 12 breaks down the PCE price index into its component parts (durables, non-durables and services). Durable goods prices have fallen more than 2% over the past year, a performance that was the norm since the late 1990s. Prices for non-durable goods, which include food and energy, have decelerated sharply from their peak rate, but this component has always been a volatile series. Services inflation, meanwhile, was still posting a 4.1% year-over- year gain as of November; although it has been easing, service prices are still rising at their fastest clip since 1991. Our skepticism that U.S. inflation will settle at around 2% is based on a few assumptions. We think the big decline in energy prices over the past year, for example, will not likely be repeated in 2024. Although there are concerns about demand-and-supply fundamentals, commercial crude oil inventory levels do not appear unduly excessive and global production of oil and other liquids has remained flat and mostly in line with demand (thanks to a series of production cuts, primarily by Saudi Arabia). As noted previously, geopolitical risk has been squeezed out of crude oil prices, despite the ongoing possibility of an escalation of the war in the Middle East. 2 The Sticky Price Consumer Index excluding shelter is calculated from a subset of goods and services included in the CPI that change price relatively infrequently. This measure includes many service-based categories, including medical services, education and personal care services. 3 The median CPI ranks the components of CPI inflation and picks the one in the middle of the distribution. 3.10 4.01 2.76 5.24 4.03 2.64 3.16 0 1 2 3 4 5 6 CPI-U, all items CPI-U, all items excluding food & energy Core sticky CPI, excluding shelter Median CPI CPI, 16% trimmed mean index PCE price index PCE price index, excluding food & energy Percent change over 12-month span Alternative CPI inflation measures

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