MNI INTERVIEW: Fed Economist: Inflation Gauge to Near 2% In Q2

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve's preferred inflation measure will

stabilize around 2% by April as low readings on financial services prices from a

year ago drop out of calculations, Dallas Fed economist Jim Dolmas told MNI.

     The price index for personal consumption expenditures excluding volatile

food and energy is likely to reach 1.9% by the second quarter, up from 1.6% in

December, he said. The mechanical nature of the step-up means the change is

unlikely to shift the Fed's thinking on monetary policy, currently in a holding

pattern, he said. 

     The Dallas Fed's trimmed mean inflation rate excluding the most positive

and negative price movements has held at 2% for months, indicating stronger

price pressure.

     "Monetary policy is not that far from neutral, so unemployment will be

moving mostly sideways as we look ahead. That tells me that for the most part

the trimmed mean rate will also move sideways, so headline PCE inflation will

also revert back to 2%," Dolmas said in an interview. 

     Markets this week fully priced in a Fed rate cut by September amid China's

coronavirus outbreak, following three reductions last year on global trade

weakness and inflation stuck below target. Before the outbreak several FOMC

members said quicker inflation and steady growth meant no change in rates unless

there was another material change in the outlook. 

     Core PCE inflation in the first quarter of last year was around 0.5%,

compared with 1.9% in the other three quarters of 2019. The volatile and

hard-to-measure financial services category accounted for roughly half of that

deceleration, he said.

     "If trends over the last nine months continue, we'll see an automatic step

up in core PCE inflation," he said. 

     --NOISY GAP

     The gap between headline PCE inflation at 1.6% in December and the Dallas

Fed's 2% trimmed mean rate "looks a lot like noise, and over time, we expect

that gap to close," Dolmas said. 

     Three "core" categories of services inflation -- rent, owners' equivalent

of rent and dining out prices -- also show price rises faster than 3% a month

for the past year, Dolmas said. 

     "I have confidence headline PCE is going to move back toward where the

trimmed mean rate is, which is around 2%, and to stay around 2%." 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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