Friday, January 08, 2016

Question #4 for 2016: Will the core inflation rate rise in 2016? Will too much inflation be a concern in 2016?

by Bill McBride on 1/08/2016 03:48:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2016. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2015.

4) Inflation: The inflation rate has increased a little recently, and some key measures are now close to the the Fed's 2% target. Will the core inflation rate rise in 2016? Will too much inflation be a concern in 2016?

Although there are different measure for inflation (including some private measures) they all show that inflation is now close to the Fed's 2% inflation target - except Core PCE.

Note:  I follow several measures of inflation, median CPI and trimmed-mean CPI from the Cleveland Fed.  Core PCE prices (monthly from the BEA) and core CPI (from the BLS).

Inflation Measures Click on graph for larger image.

On a year-over-year basis in November, the median CPI rose 2.5%, the trimmed-mean CPI rose 1.9%, and the CPI less food and energy also rose 2.0%. Core PCE is for October and increased 1.3% year-over-year.

On a monthly basis, median CPI was at 2.1% annualized, trimmed-mean CPI was at 1.4% annualized, and core CPI was at 2.2% annualized..

Due to some remaining slack in the labor market (example: elevated level of part time workers for economic reasons), I expect these measures of inflation will be close to the Fed's target in 2016.

So currently I think core inflation (year-over-year) will increase further in 2016, but too much inflation will not be a serious concern in 2016.

Here are the Ten Economic Questions for 2016 and a few predictions:

Question #1 for 2016: How much will the economy grow in 2016?
Question #2 for 2016: How many payroll jobs will be added in 2016?
Question #3 for 2016: What will the unemployment rate be in December 2016?
Question #4 for 2016: Will the core inflation rate rise in 2016? Will too much inflation be a concern in 2016?
Question #5 for 2016: Will the Fed raise rates in 2016, and if so, by how much?
Question #6 for 2016: Will real wages increase in 2016?
Question #7 for 2016: What about oil prices in 2016?
Question #8 for 2016: How much will Residential Investment increase?
Question #9 for 2016: What will happen with house prices in 2016?
Question #10 for 2016: How much will housing inventory increase in 2016?