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The Federal Reserve’s preferred inflation measure, the personal consumption expenditure (PCE) deflator ex food and energy, has just reached 2.0%. This is the central bank’s long-term inflation target and also the FOMC members’ median expectation for the end of 2018. It is the highest level since 2009, bar a short period end 2011-early 2012. Actually, this inflation gauge has reached 1.95%, but it will likely surpass 2.0% within the next few months.
OUR ANALYSIS
It is indeed highly likely that core PCE inflation will surpass 2.0% in the next few months. Core prices increased at a monthly average of 0.1% between June and August 2017. However, over the last six months the average increase has been closer to 0.2%. If prices increase at the same pace over the next three months, then the year-on-year change in prices could be above 2.2% by August.
Several FOMC* members have stated that the central bank would tolerate inflation above 2.0% for some time. However, if inflation keeps accelerating, it could come closer to 2.5%, a level not seen since 1993. This would likely lead to faster interest rate hikes.
*Federal Open Market Committee
The opinion expressed above is dated 05 July 2018 and is liable to change.
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