US core inflation to remain above 2 pct in 2016, 2017

The FOMC appears to be at ease with the state of the US economy and seems to be eager to see through the weak Q1 activity data, exerting weight on continuing rebound in the labor market, said Barclays in a research report. The FOMC members’ confidence that inflation target might be achieved in a reasonable time has also been stimulated by the recent inflation figures. The members, during their meetings in March and April conceded that the headwinds from financial and global economic developments have diminished.

Given the better economic backdrop, several members of the committee appear to be comfortable with two rate hikes in 2016. The minutes had suggested that several FOMC participants consider June as a “likely” possibility to raise rates.

The US CPI inflation data from April has strengthened the sentiment that core inflation will continue to be more than 2% in 2016 and 2017, noted Barclays. In the last few months, both headline and core inflation have strengthened as direct effects of oil price decline of 2014 have fallen out, as appreciation of US dollar has faded and as inflation continues to be pressured by strong domestic activity. Services inflation is likely to keep accelerating in the next two years, according to Barclays.

Even if the central bank’s preferred inflation measure, PCE inflation, continues to be lower than the target rate, stronger CPI inflation will provide the FOMC with confidence in its forecast that PCE inflation will accelerate towards the target rate, added Barclays.

Meanwhile, manufacturing output in the US has faced several significant headwinds that have weighed on the US economy in the past two years. Durable goods manufacturing grew 0.6% m/m, while machinery production grew 2.4% m/m after falling for seven consecutive months. On the contrary, the decline in mining activity is gathering momentum. The resilience of US manufacturing shows the US economy’s underlying strength, noted Barclays.

“Although manufacturing is set to weigh on growth and mining is unlikely to recover, we suspect that the FOMC feels comfortable with the state of the US industrial sector”, said Barclays.