U.S. headline, core inflation to overshoot Fed’s 2 pct target in 2017 and 2018 – Nordea Bank

Recent inflation data for the U.S. have been more subdued than anticipated. However, rather than reflecting a new weaker trend, the weakness is possibly due to the result of a mix of one-offs including a sharp drop in mobile phone service prices and payback for exaggerated strength in January and February, noted Nordea Bank.

The case for stronger underlying inflation pressures continues to be solid. Therefore, even wider measures of underemployment now indicate that the labor market is at or quite close to full employment. The jobless rate, which is 4.4 percent at present, is expected to stay significantly below the Fed’s NAIRU estimate of 4.7 percent.

Given that the productivity growth is stagnant, continued rise in wage growth would keep upward pressure on unit labor costs and core inflation. Unit labor costs have already been running at or above the U.S. Fed’s 2 percent inflation target for a couple of years.

“With the push to inflation caused by rising wages likely to strengthen, both headline and core CPI inflation rates are forecast to overshoot the Fed’s 2 percent target in both 2017 and 2018”, added Nordea Bank.