U.S. Inflation Is Finally Picking Up. Probably

  • Economists see July core CPI up 0.2% after four weak months
  • Report may affect Fed’s path for raising interest rates

St. Louis Fed President James Bullard discusses the outlook for rates and inflation with Bloomberg's Kathleen Hays on 'Bloomberg Markets.' (Source: Bloomberg)

U.S. inflation is finally picking up -- or at least that’s the expectation of economists who have been wrong-footed by sub-par readings four months in a row.

Analysts surveyed by Bloomberg say consumer prices excluding energy and food probably rose 0.2 percent in July from the previous month, according to the median estimate ahead of Friday’s data from the Labor Department. If right, that would end a four-month string of below-forecast readings in the so-called core index, the weakest stretch since 2010.

Most economists are counting on a depreciating dollar, rising import prices and a tight job market to generate stronger price pressures across the economy. Yet a significant minority -- 21 of the 75 surveyed -- estimate that inflation stayed subdued last month, with the core gauge rising only 0.1 percent.

Federal Reserve policy makers also seem divided over the inflation outlook. Some blame the recent run of low figures on transitory factors -- cheap airfares being the latest culprit cited -- while others aren’t so sure. The resolution of that debate will go a long way toward determining whether the central bank presses ahead with its plan for one more interest-rate increase this year.

“For the Fed, the burden is on the CPI data to turn higher in the next few months,” said Michelle Meyer, head of U.S. economics at Bank of America Corp. in New York. Meyer, who said that though her expected 0.2 percent rise in the core index wouldn’t be a “dramatic swing” upward, “a number of categories could bounce a little bit higher from the past few months of showing considerable weakness.”

Data released Thursday don’t bode well for a pickup: Core wholesale prices unexpectedly fell 0.1 percent in July from the prior month, and a closely watched measure that also excludes trade services was unchanged.

Below Target

While the Fed has succeeded in driving unemployment lower with its gradual approach to raising borrowing costs, the central bank has failed to lift inflation to its 2 percent target, matching or exceeding it in only two months of the last five years.

Although the Fed bases its objective on a separate Commerce Department price gauge that will be updated on Aug. 31, Friday’s CPI report is nevertheless important because it provides the first look at what happened to inflation last month. It also contains many components that feed into the Fed’s preferred index. The overall CPI probably rose 0.2 percent, bringing the year-over-year gain to 1.8 percent from 1.6 percent in June, the Bloomberg survey median shows.

Economists projecting stronger inflation argue that the last four months have been an aberration, with the readings pushed down by one-time drops in categories such as prescription-drug prices and wireless-service fees.

Firm import prices and a weak dollar also signal higher inflation is in train, according to Bruce Kasman, chief economist at JPMorgan Chase & Co. “Goods prices, both headline and core and specifically in the U.S., are going to rebound in the next three or four months,” he said in a video for clients last week.

Central Bank

Fed officials aren’t united on the issue.

John Williams, president of the San Francisco Fed, played down the significance of recent soft inflation data, ascribing it to unusual forces. “As these transitory factors wane and with the economy doing well, I expect that we’ll reach our 2 percent goal in the next year or two,” he told the Economic Club of Las Vegas last week.

By contrast, St. Louis Fed President James Bullard, who advocates keeping interest rates low, said progress toward the inflation target “has been undone” this year. “I’m not too optimistic that we will have higher inflation” on an annual basis by the end of 2017, he said in a Bloomberg Television interview on Wednesday. “We’ve got a ways to go.”

Some analysts are also skeptical that inflation is accelerating. Richard Moody, chief economist at Regions Financial Corp., expects a 0.1 percent core CPI gain for July because of downward pressure from goods prices and a smaller rise in rents. Health-care costs have also been surprisingly tame, wages remain weak and retailers lack pricing power, he said.

“The reality is, there’s just not a lot of inflation pressure out there,” said Moody, who’s based in Birmingham, Alabama. He’s forecasting a December hike by the Fed, though “with little conviction. That is literally going to be a show-me-the-inflation argument.”

Omair Sharif, Societe Generale’s senior U.S. economist in New York, also expects a 0.1 percent rise, though he said the numbers should improve over the next few months.

At the same time, the underlying inflation picture will remain weak because of “a more worrisome deceleration in some heavily-weighted components of core CPI” including shelter and health care. Sharif sees the slowdown as broad: Of 62 sub-components of core CPI that he tracks, 38 were cooling from a year earlier over the January-through-June period, while 24 were accelerating.

“I’d come down on the side that says we have more work to do on inflation,” Sharif said.

— With assistance by Kathleen Hays

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