Friday, December 27, 2019

Question #6 for 2020: Will the core inflation rate rise in 2020? Will too much inflation be a concern in 2020?

by Calculated Risk on 12/27/2019 11:54:00 AM

Earlier I posted some questions for next year: Ten Economic Questions for 2020. I'm adding some thoughts, and maybe some predictions for each question.

6) Inflation: By some measures, inflation rate has increased and is now slightly above the Fed's 2% target. However core PCE was only up 1.6% YoY through November. Will the core inflation rate rise in 2020? Will too much inflation be a concern in 2020?

Although there are different measure for inflation (including some private measures) they mostly show inflation slightly above the Fed's 2% inflation target.  Core PCE was below the target at 1.6% YoY in November.

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 MeasuresClick on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.9%, the trimmed-mean CPI rose 2.4%, and the CPI less food and energy rose 2.3%. Core PCE is for October and increased 1.6% year-over-year.

On a monthly basis, median CPI was at 2.9% annualized and trimmed-mean CPI was at 3.1% annualized.

The Fed is projecting core PCE inflation will increase to 1.9% to 2.0% by Q4 2020.  There are risks for higher inflation with the labor market near full employment, however I do think there are structural reasons for low inflation (demographics, few employment agreements that lead to wage-price-spiral, etc).

So, although I think core PCE inflation (year-over-year) will increase a little in 2020 (from the current 1.6%), I think too much inflation will still not be a serious concern in 2020.

Here are the Ten Economic Questions for 2020 and a few predictions:

Question #1 for 2020: How much will the economy grow in 2020?
Question #2 for 2020: Will job creation in 2020 be as strong as in 2019?
Question #3 for 2020: What will the unemployment rate be in December 2020?
Question #4 for 2020: Will the overall participation rate start declining in 2020, or will it move more sideways (or slightly up) in 2020?
Question #5 for 2020: How much will wages increase in 2020?
Question #6 for 2020: Will the core inflation rate rise in 2020? Will too much inflation be a concern in 2020?
Question #7 for 2020: Will the Fed cut or raise rates in 2020, and if so, by how much?
Question #8 for 2020: How much will RI increase in 2020? How about housing starts and new home sales in 2020?
Question #9 for 2020: What will happen with house prices in 2020?
Question #10 for 2020: Will housing inventory increase or decrease in 2020?