US health-care services may boost core inflation this summer

The labour-market side of the Fed's dual mandate is a box checked - or almost - as the economy approaches full employment and unemployment is now mostly structural not cyclical. For the inflation side, progress has been much more subdued, despite sizeable Fed liquidity injections since the 2008-09 global financial crisis (GFC) and an extended period of low rates. April's core (excludes volatile energy and food components) PCE inflation print, which the Fed particularly scrutinises, edged down to a modest 1.2% y/y. It has averaged 1.3% so far this year.

The near-term outlook for the core personal consumption expenditure (PCE) price index will depend on three components: rents, health-care prices and airfares, says Standard Chartered. Ironically, these are mostly outside of the Fed's direct control. While rent acceleration could boost core inflation, airfares are about to drop significantly, offsetting higher rents. Recent news that domestic airlines may cut fares on higher competition and the lagged impact of lower oil prices supports this view. Core inflation seems to be bottoming at current levels and edging up to 1.3% by July and 1.5% by September, mostly driven by health-care inflation, which seems to be edging up near-term, according to Standard Chartered.

As the Fed ponders the right moment to raise rates, persistently low core inflation supports the Fed doves' view that continued patience is warranted. A pre-condition for Fed tightening, apart from "further improvement" in the labour market, is "reasonable confidence" of a return to 2% inflation, allowing ample room for interpretation. Only core inflation moving down towards 1% y/y may delay the start of the hiking cycle, which is not the base scenario and a September hike is expected, says Standard Chartered.