FxWirePro: US consumer price inflation likely to hit 2 pct through this year

The United States’ consumer price-led inflation index is expected to hit 2 percent through this year, according to a recent poll by FxWirePro. With the pace of rising inflation, the Federal Reserve is expected to raise policy rates gradually to 2 percent by end-2018.

Inflation overshoots the target during the projections, though the monetary tightening, fading of the fiscal impulse and anchored expectations will return it towards the target in the medium term. The gradual rise in interest rates will begin to reduce some of the financial distortions that have emerged under a policy of sustained very low-interest rates.

Sluggishness in core inflation in advanced economies—a surprise in view of stronger-than-expected activity—has coincided with the slow transmission of declining unemployment rates into faster wage growth. Real wages in most large advanced economies have moved broadly with labor productivity in recent years, as indicated by flat labor income shares.

Muted growth in nominal wages in recent years partly reflects sluggishness in labor productivity. However, the analysis also reveals continued spare capacity in labor markets as a key drag: wage growth has been particularly soft where unemployment and the share of workers involuntarily working part-time remain high.

In the United States, where core inflation is higher, the annual change in the core personal consumption expenditure deflator (the Federal Reserve’s preferred measure) declined from just below 2 percent in early 2017 to 1.4 percent in August. This decline in part reflected one-off factors (including a reduction in prices of cell phone plans and prescription drug prices).

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