MNI EXCLUSIVE: Fed Economists See Temporary Ebb in Inflation

By Jean Yung

     WASHINGTON (MNI) - Recent weakness in U.S. inflation was likely exaggerated

by one-off price moves in isolated categories, and low rates of increases in

health care prices will continue to restrain overall levels, Federal Reserve

economists said in interviews over the past week.

     While President Donald Trump's latest tariff hikes on Chinese imports could

result in a modest boost to inflation, the effects are difficult to pinpoint and

would be viewed as transitory, they said.

     Cyclical components of the Fed's favored personal consumption expenditures

inflation gauge have stayed high, in line with a healthy economy and tight labor

market, said San Francisco Fed economist Adam Shapiro. Brent Meyer of the

Atlanta Fed and Randy Verbrugge of the Cleveland Fed added that alternate

measures of underlying CPI have also held steady, which supports Fed Chair Jay

Powell's statement this month that transient factors were holding down

inflation.

     The Cleveland Fed median CPI turned in at 2.8% year-over-year for the past

three months, while Atlanta's sticky-price CPI held at 2.4% over the same

period.

     "It's my view that a lot of the softness we've seen reflects transitory

factors," Meyer said. "It's not a real shortfall in underlying inflation."

     That inflation has moved down this year despite steady growth and tight

labor markets has puzzled Fed officials and fueled speculation that an interest

rate cut would be necessary. The Labor Department's CPI excluding food and

energy rose just 2.1% in April from a year earlier, and the 3-month trend

dropped four-tenths of a percentage point to 1.6% annualized. CPI typically runs

higher than PCE inflation.

     --RECENT OUTLIERS

     Two of the most significant contributors to lower core CPI in April, used

cars and apparel, are considered "flexible-price" categories, as they respond to

changing market conditions quickly.

     Used car prices fell 1.3% and have been down in four of the last five

months, a cumulative drop that matches the worst since the recession. Apparel

prices fell by 0.8% in April after posting their steepest decline in 70 years a

month earlier due to a change in methodology and a new data source.

     Research shows flexible price items, down 3.9% in the past three months,

"tend not to be very useful in forecasting future inflation," Meyer said. "They

can be pushed around a lot by idiosyncratic factors and noise."

     By contrast, sticky categories like rent, owners' equivalent rent, dining

out and medical care services embed expectations about future inflation to a

greater degree and have been shown to better forecast headline CPI over a

one-to-two-year time horizon, Meyer said.

     Verbrugge of the Cleveland Fed added that he expects apparel inflation to

continue to be volatile this year. Evidence suggests the seasonal pattern in the

new data source is slightly different than the previous CPI apparel sample, he

said.

     --HEALTH CARE, TARIFFS

     Health care inflation is now less than 2% and will likely weigh on core PCE

inflation for months to come, Shapiro of the San Francisco Fed said. Recent

legislation has cut the growth rate of public payments to providers. Some of

these expire in 2025 but others are permanent.

     The medical care services prices category in CPI historically experienced

higher inflation than most other components, but growth in doctor and hospital

fees has slid steadily since 2017. As a result, for most of this year the

category has occupied the center of a weighted distribution of price changes,

Verbrugge said.

     "Health care is still a drag," Shapiro said.

     Even the cyclical categories are a little weaker than expected given the

low unemployment rate, he added. An across-the-board 25% tariff on all Chinese

imports could raise PCE inflation another 0.3 percentage point over the course

of a few months, according to San Francisco Fed research, but "if anything, it's

transitory," Shapiro said, "and the effects are small."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: MMUFE$,M$U$$$]