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Free AccessMNI INTERVIEW: Inflation Likely Higher Than BEA Says-Fed Econ
--Fed Economist's Data Sees Jan PCE Infl 1.6% V 1.8% Dec After Annual Revisions
--Inflation To Rise in 2018; No Material Impact on Core Infl From Weaker Dollar
By Jean Yung
WASHINGTON (MNI) - Tight labor markets should have a more evident effect on
price levels this year as headwinds from the U.S. dollar exchange rate and
energy prices dissipate, pushing inflation toward the Federal Reserve's 2%
objective, Dallas Fed Senior Vice President Evan Koenig told MNI in an exclusive
interview.
Koenig, a principal policy adviser who prepares the Dallas Fed chief for
FOMC meetings, also suggests that inflation is actually higher than the Commerce
Department's current estimates, using an experimental forecasting model.
Their latest "nowcast" for the personal consumption expenditures price
index, the Fed's preferred gauge of consumer price levels, saw overall inflation
in their series reaching 1.9% in September and November before retreating to
1.8% in December and 1.6% in January.
The model's estimates rely on lagged inflation rates as well as
survey-based price data from the Institute for Supply Management and regional
Fed banks. The nowcast is updated as data becomes available and predicts a
"true" headline PCE inflation rate that accounts for projected annual revisions
out of the Bureau of Economic Analysis.
Current BEA estimates for headline PCE inflation are 1.7% in December and
1.8% in November. It won't release figures for January until March 1, and will
issue annual revisions to the data in the summer.
--INFLATION HEADED HIGHER
"Even though the model is predicting a pretty strong inflation rate for the
month of January," at roughly 4% annualized, "January 2017 was an exceptionally
high number" that will drop out of calculations, Koenig said. The 5.2% rate that
month was the second highest in the expansion so far.
The Fed's 2% inflation objective is defined in terms of headline inflation,
which directly affects households' purchasing power. But officials have
struggled to meet that goal. Headline inflation fell short in 2014-2016 due to
declining oil prices and the dollar appreciation's impact on import prices. Last
year, some of that drag reversed, yet policymakers struggled to explain why
inflation did not tick higher amid labor market improvements.
Koenig believes the relationship between slack and inflation remains intact
and will come to the fore this year.
"Some of the headwinds holding down inflation seem to be dissipating and I
would expect the effect of tight labor markets to become more evident, and to
see inflation move toward the Fed's 2% objective over the course of 2018," he
said. "If you look at 12-month or 6-month inflation rates, many measures of
inflation have bottomed out and are headed back up."
--LAGGED EFFECTS
One reason Koenig and other Fed economists think inflation has run below
target over the last couple years is due to certain lagged effects. Koeing said
he did not expect inflation to rise in 2017 because the declines in import and
energy prices in 2015 and 2016 were still filtering through to the bank's core
inflation rate a year later.
"One possibility is, if you've gone through a period with falling import
prices and energy prices, that translates into lower wage demands on behalf of
workers, and that could influence prices on a wide variety of goods and
services."
In 2017, the dollar has stopped rising and energy prices have stopped
falling. "So here in 2018 we're not expecting a drag on trimmed mean inflation.
We think the effects of slack will be more evident and not be muddied up by
those other influences," he said.
Koenig noted that, to date, headline PCE inflation hasn't been that
different from the trimmed mean, which likely means the dollar movements have
not yet been large enough to have a material impact on trend inflation.
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com
[TOPICS: MMUFE$,M$U$$$,MT$$$$,MX$$$$]
To read the full story
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Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.