While headline CPI inflation of the US is still close to zero, held down by lower energy prices, core CPI is up at a 2.5% annual rate so far this year (April vs December), up from a 1.6% pace in 2014. Compared to 12 months ago, core CPI is 1.8% higher.
According to the Nordea Bank's estimation, the headline CPI inflation will remain close to zero through Q2 before gradually moving towards 2% by end-2015 and 2½% in early 2016, whereas, brent oil prices will gradually rise to around USD 70 per barrel over this period.
Core inflation will continue to be driven by a tug-of-war between lower import prices due to the stronger USD and higher wage inflation as the labour market continues to tighten. On balance, core CPI inflation to gradually move towards 2% by year-end, driven by stronger wage increases and higher rents inflation given low and falling rental vacancy rates, says Nordea Bank. Labour-intensive service prices and rents represent around 75% of the core CPI, while imported goods prices make up only about 6% of the core.
In other words, in 6-12 months both growth and inflation will be much higher than recent readings, added Nordea Bank. Such a change could trigger a massive shift in market expectations, with increasing concern that the Fed is falling behind the curve and a significant boost to currently still low inflation expectations.
