Sunday, December 31, 2017

Question #4 for 2018: Will the core inflation rate rise in 2018? Will too much inflation be a concern in 2018?

by Bill McBride on 12/31/2017 08:57:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2018. I'm adding some thoughts, and maybe some predictions for each question.

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 core inflation rate rise in 2018? Will too much inflation be a concern in 2018?

First, Tim Duy discusses the Fed's view of inflation: 5 Questions for the Fed in 2018

Inflation is always just a year away in the Fed’s forecast, and this year is no exception to that rule. In general, central bankers maintain that temporary factors such as declining mobile-phone service costs accounted for this year’s inflation shortfall. Hence, policy makers expect core inflation to accelerate to 1.9 percent in 2018 as those factors dissipate. Another inflation disappointment in 2018, however, would increase chatter at the central bank that maybe inflation expectations are declining and need to be bolstered with a more gradual path of tightening.
This is a key question: Was inflation soft in 2017 due to transitory factors?  Or was soft inflation more structural?  I'm not going to discuss the possible structural reasons for low inflation, but there are several possible reasons including demographics, globalization, online buying, wealth inequality and more.

Although there are different measure for inflation (including some private measures) they mostly show inflation a little below the Fed's 2% inflation target, especially 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 2.3%, the trimmed-mean CPI rose 1.8%, and the CPI less food and energy rose 1.7%. Core PCE is for October and increased 1.4% year-over-year.

On a monthly basis, median CPI was at 2.7% annualized, trimmed-mean CPI was at 2.4% annualized, and core CPI was at 1.4% annualized.

The Fed is projecting core PCE inflation will increase to 1.7% to 1.9% by Q4 2018.  However there are risks for higher inflation with the labor market near full employment, and new tax law providing some fiscal stimulus.

I do think there are structural reasons for low inflation, but currently I think PCE core inflation (year-over-year) will increase in 2018 and be closer to 2% by Q4 2018 (up from 1.4%), but too much inflation will still not be a serious concern in 2018.

Here are the Ten Economic Questions for 2018 and a few predictions:

Question #1 for 2018: How much will the economy grow in 2018?
Question #2 for 2018: Will job creation slow further in 2018?
Question #3 for 2018: What will the unemployment rate be in December 2018?
Question #4 for 2018: Will the core inflation rate rise in 2018? Will too much inflation be a concern in 2018?
Question #5 for 2018: Will the Fed raise rates in 2018, and if so, by how much?
Question #6 for 2018: How much will wages increase in 2018?
Question #7 for 2018: How much will Residential Investment increase?
Question #8 for 2018: What will happen with house prices in 2018?
Question #9 for 2018: Will housing inventory increase or decrease in 2018?
Question #10 for 2018: Will the New Tax Law impact Home Sales, Inventory, and Price Growth in Certain States?