Price increases for services excluding shelter have accelerated since December, propelled by a tight labor market and strong wage growth. Meanwhile, a year-long slowdown in the pace of shelter inflation has not been sharp enough to comfort the Fed. “Shelter inflation is critical to core inflation reaching the Fed’s target,” said Ryan Zalla, a Vanguard economist who studies price behavior. “If shelter inflation were to return to its prepandemic average of around 2.5%, core CPI would be approximately 2%.”

Stubborn shelter prices reflect heightened housing demand, supported by a strong labor market, and low supply, abetted by the reluctance of many homeowners to give up low mortgage rates by moving. “For shelter inflation to moderate, labor market conditions will have to materially weaken, or housing supply will have to increase,” Zalla said. “Meaningful changes in either appear unlikely to materialize soon.” 

The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of April 17, 2024.

Our 10-year annualized nominal return and volatility forecasts are shown below. They are based on the December 31, 2023, running of the Vanguard Capital Markets Model® (VCMM). Equity returns reflect a range of 2 percentage points around the 50^th percentile of the distribution of probable outcomes. Fixed income returns reflect a 1-point range around the 50^th percentile. More extreme returns are possible. 

In addition to the following table with our outlook for 10-year performance, we offer an interactive graphic that presents our return and volatility estimates over both 10- and 30-year horizons, in table and chart views.

The latest inflation and labor market data imply that U.S. production of goods and services remains healthy and underscore our view that continued economic strength might prevent the Federal Reserve from cutting interest rates in 2024.

• Measured by the Consumer Price Index, services prices were 5.3% higher on a year-over-year basis in March. Headline inflation advanced 3.5% year over year. We expect the Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) index, which excludes food and energy prices due to their volatility, to record full-year 2024 inflation of about 2.6%.

• The U.S. labor market remains irrefutably strong. Workers on private nonfarm payrolls earned an average of $34.69 per hour in March, up 4.1% year over year and above the 3%–3.5% annual rate that we view as noninflationary. We forecast a modest rise in the unemployment rate—from 3.8% to about 4%—by year-end.

• We expect real (inflation-adjusted) U.S. economic growth of about 2% in 2024, higher than our initial estimate of about 0.5%.
  

China’s economy appeared to have made a solid start to 2024. But already questions have arisen about the sustainability of its growth after the second quarter, when year-over-year comparisons will be relatively easy.

• Economic growth had softened by the second quarter of 2023, as the unleashing of strong, pent-up demand post-COVID couldn’t be maintained. That soft patch will flatter year-over-year performance in this year’s second quarter. Continued strong growth increases the prospect that, with its full-year growth target of “about 5%” well in sight, China may not address underlying economic imbalances.

• Structural imbalances are likely to remain given the government’s policy priorities for investment and manufacturing upgrades over more direct measures to support consumer spending. We expect resulting supply-and-demand imbalances to continue to add to deflationary pressure amid weak consumer demand. To mitigate deflationary pressure, we forecast that the People’s Bank of China will cut its policy rate from 2.5% to 2.2% in 2024 and trim banks’ reserve requirement ratios.

• We foresee elevated real (inflation-adjusted) interest rates continuing to weigh on prices. We recently lowered our forecast for full-year core inflation from a range of 1%–1.5% to 1% and our forecast for headline inflation from 1.5%–2% to less than 1%, well below the central bank’s 3% inflation target. 

Speaking on April 11, European Central Bank (ECB) President Christine Lagarde emphasized that the ECB would be “data-dependent, not Fed-dependent” in considering the appropriate policy rate. Her reference was to the risk that, by maintaining its current rate target for an extended period, the U.S. Federal Reserve could spur other central banks to leave their rate targets higher than they otherwise might. Cross-border gaps in policy rates can put downward pressure on currencies where rates are lower, increasing inflation risk.

• Vanguard expects the ECB to trim its interest rate target by 25 basis points at each of its five remaining 2024 policy meetings, but rising energy prices skew risks toward a slower pace of easing. (A basis point is one-hundredth of a percentage point.) In our baseline case, the ECB’s policy rate ends 2024 in the 2.5%–3% range.

• The euro area’s economy is showing tentative signs of having bottomed in the fourth quarter of 2023. We continue to expect 2024 economic growth of just 0.5%–1% amid still-restrictive monetary and fiscal policy and the lingering effects of Europe’s energy crisis.

• The confluence of moderating wage growth, inflation expectations that remain in check, and lackluster demand supports our expectation that headline inflation will fall to 2% by September 2024 and core inflation will reach that same target by December. Headline prices were up 2.4% on a year-over-year basis in March. Core prices, which exclude the volatile food, energy, alcohol, and tobacco sectors, were up 2.9%.

• We expect the unemployment rate to end 2024 around its current 6.5% level. The labor market may be softer than the unemployment rate would suggest, however; job vacancy rates, though still high, have receded, labor hoarding remains elevated, and the number of hours worked has stagnated.

A continued moderation in wage growth and encouraging inflation news could set the stage for policy interest rate cuts this summer. Growth in average regular pay, which excludes bonuses, slowed to 6.0% between December and February, a sixth consecutive moderation in the rolling, three-month measure.

• A reduction in the maximum price that energy suppliers can charge for a unit of energy should support falling headline inflation. Ofgem, Great Britain’s independent energy regulator, reduced its energy price cap for the April-June 2024 period by 12% following recent falls in wholesale energy prices. However, we’re watching crude oil prices amid heightened tension in the Middle East. We foresee headline inflation falling to just below 2% and core inflation falling to about 2.6% by year-end. The latest year-over-year readings, for March, were 3.2% and 4.2%, respectively.

• Encouraging wage and inflation data underscore our view that the Bank of England will begin a series of interest rate cuts beginning in August, with the bank rate falling by a percentage point to 4.25% by year-end.

• GDP data for January and February suggest the U.K. economy is emerging from a brief recession in the second half of 2023. We recently lowered our forecast for 2024 GDP growth to about 0.3%, down from an initial range of 0.5%–1%.

• As in the euro area, the labor market’s gradual loosening appears mainly driven by reduced vacancies and fewer hours worked, rather than an increase in unemployment. We recently lowered our year-end 2024 unemployment rate forecast from 4.5%–5% to 4%–4.5%. 

Amid continued strength in the U.S. economy, we have upgraded our 2024 GDP growth forecast for Mexico. U.S. demand for Mexican goods has remained strong, and domestic wages and consumption are holding up. Our revised forecast is for 1.75%–2.25% growth, up from 1.5%–2% but still below trend amid restrictive monetary policy.

• We continue to expect the world’s emerging markets to deliver economic growth of about 4%, on average, this year, led by growth of about 5% for emerging Asia.

• We forecast growth in the 2%–2.5% range for emerging Europe and Latin America, though U.S. growth could have positive implications for Mexico and all of Latin America.

• We expect that Mexico’s core rate of inflation will fall to 3.6%–3.8% and that the Banco de México will cut the overnight interbank rate to 9%–9.5% by year-end.
  

Canada’s economy avoided recession in the fourth quarter of 2023, thanks to the strongest population growth since 1957, which fueled consumption, and U.S. economic resilience, which buoyed exports. We continue to foresee below-trend growth in 2024 but have increased our growth forecast from about 1% to a range of 1.25%–1.5%. Risks skew to the downside amid the continued bite from restrictive monetary policy.

• We expect that the Bank of Canada (BOC) will trim its overnight rate by 50 to 75 basis points this year, to a year-end range of 4.25%–4.5%. (A basis point is one-hundredth of a percentage point.) The first cut is likely to be announced on June 5, after the next central bank policy meeting.

• As in the U.S., the “last mile” of inflation reduction could be the most challenging. We continue to foresee core inflation falling to a year-over-year pace within the BOC’s target range of 2%–2.5% by the end of 2024, with house prices moderating in response to declining affordability. Shelter prices, up 6.5% on a year-over-year basis last month, remain an upside risk amid immigration-fueled population growth.

• Amid weak economic growth, we forecast that the unemployment rate will end 2024 in the 6%–6.5% range. It was 6.1% last month.
  

Sticky rent prices and a still-tight labor market position the Reserve Bank of Australia (RBA) to be among the last developed market central banks to ease policy rates. We expect the RBA to cut the cash rate by 50 basis points, to 3.85%, by year-end, and that the rate eventually will settle in the 3%–4% range, in line with our assessment of the neutral rate—the theoretical rate that would neither stimulate nor restrict the economy.

• We foresee both headline and core inflation falling to around 3% year over year by the end of 2024, down from 3.4% and 3.9% on a “trimmed mean” basis, respectively, in February. We expect inflation to fall to the midpoint of the RBA’s 2%–3% target range in 2025.

• We forecast a year-end unemployment rate of about 4.6%, as financial conditions tighten amid elevated interest rates. It was 3.7% in February.

• Leading indicators suggest that broad economic activity is marginally below our estimate of trend or sustainable growth. We expect rising real household income, a reflating housing market, and improving business and consumer sentiment to support a gradual acceleration in growth. We continue to expect that Australia will avoid recession in 2024, with below-trend GDP growth of about 1%. 
  

• Why the U.S. dollar remains a reserve currency leader (article, issued April 2024)
• A resilient U.S. economy continues to surprise (article, issued March 2024)
• Why the Fed might choose to forgo rate cuts (guest column for Barron’s—subscription required, issued March 2024)