Thursday, December 31, 2020

Question #5 for 2021: Will the core inflation rate increase in 2021? Will too much inflation be a concern in 2021?

by Calculated Risk on 12/31/2020 01:43:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2021. I'm adding some thoughts, and maybe some predictions for each question.

5) Inflation: Core PCE was only up 1.4% YoY through November. Will the core inflation rate increase in 2021? Will too much inflation be a concern in 2021?

Although there are different measure for inflation they mostly show inflation at or below the Fed's 2% inflation target.

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 2.3%, the trimmed-mean CPI rose 2.1%, and the CPI less food and energy rose 1.6%. Core PCE is for October and increased 1.4% year-over-year.

The Fed is projecting core PCE inflation will increase to 1.7% to 1.8% by Q4 2021.  


We will likely see some year-over-year jumps in some measures of inflation, since we saw some deflation in 2020. For example, we saw negative Month-to-month (MoM) core CPI and CPI readings in March, April and May. Assuming positive readings in those months in 2021, the YoY change in CPI and core CPI will jump.

We also saw negative MoM PCE and core PCE reading in March and April.  IMPORTANT: Ignore a jump in YoY inflation in March, April and May!

My guess is core PCE inflation (year-over-year) will increase in 2021 (from the current 1.4%), but I think too much inflation will NOT be a concern in 2021.

Here are the Ten Economic Questions for 2021 and a few predictions:

Question #1 for 2021: How much will the economy grow in 2021?
Question #2 for 2021: Will all the jobs lost in 2020 return in 2021, or will job growth be sluggish?
Question #3 for 2021: What will the unemployment rate be in December 2021?
Question #4 for 2021: Will the overall participation rate increase to pre-pandemic levels (63.4% in February 2020) , or will it will only partially recover in 2021?
Question #5 for 2021: Will the core inflation rate increase in 2021? Will too much inflation be a concern in 2021?
Question #6 for 2021: Will the Fed raise rates in 2021? What about the asset purchase program?
Question #7 for 2021: How much will RI increase in 2021? How about housing starts and new home sales in 2021?
Question #8 for 2021: What will happen with house prices in 2021?
Question #9 for 2021: Will inventory increase as the pandemic subsides, or will inventory decrease further in 2021?
Question #10 for 2021: How much damage did the pandemic do to certain sectors?