Thursday, March 24, 2016

Goldman: "Inflation Finally Begins to Firm"

by Bill McBride on 3/24/2016 07:42:00 PM

• At 8:30 AM ET, Gross Domestic Product, 4th quarter 2015 (Third estimate). The consensus is that real GDP increased 1.0% annualized in Q4, unrevised from the second estimate.

• At 10:00 AM, Regional and State Employment and Unemployment (Monthly) for February 2016 from BLS.

A few excerpts from a research piece by Goldman Sachs economists David Mericle and Chris Mischaikow: Inflation Finally Begins to Firm

Fed officials have long argued that inflation has been soft primarily due to transitory factors and would eventually rise as these influences faded and the labor market tightened. Over the last half year, inflation has picked up substantially in a manner that closely fits the Fed’s narrative. Yet at the March FOMC meeting, both the Committee’s inflation projections and comments from Chair Yellen suggested a puzzlingly skeptical take on the encouraging recent data.

We see three broad reasons for the skepticism of some FOMC participants. First, some see ... one-off factors that are unlikely to persist. Second, others likely see downside risks from recent declines in inflation expectations. Third, some participants likely expect further drag from past or future dollar appreciation. ...

In our view, the FOMC had it right the first time. We expect disinflationary forces to fade further this year, while inflationary pressures should strengthen as the labor market continues to tighten ... As a result, we expect core PCE inflation to reach 1.8% by 2016Q4, 0.2pp above the FOMC’s projection, and headline PCE inflation to reach 1.5%, 0.3pp above the FOMC’s projection.

... As the year progresses, we expect that the FOMC will gradually revise up its inflation projections and ultimately conclude that an even stronger acceleration to 1.8% merits three hikes this year rather than two.