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MNI INTERVIEW: No Sign of Sharp Inflation Rise - Fed Economist

By Jean Yung
     WASHINGTON (MNI) - Inflationary pressures remain low and stable and there
is little indication price levels are moving sharply higher, despite tariffs and
higher labor costs, Federal Reserve Bank of Dallas Senior Economist Jim Dolmas
told MNI in an interview.
     Dolmas, who oversees the Dallas Fed's trimmed mean PCE inflation data
series, a key internal indicator of core inflation for Fed officials, said he's
"not concerned about inflation getting out of hand."
     The policymaking Federal Open Market Committee projects a "very, very mild
overshoot of 2%, and that's consistent with the forecast you'd get with models
that use the trimmed mean PCE," he said.
     Fed officials are looking to raise interest rates gradually over the coming
year, based on the belief that core inflation is climbing amid solid economic
growth and low unemployment. But Chair Jay Powell and others have warned that
the FOMC might need to move a bit quicker if inflation surprises to the upside.
     --LOW AND STEADY
     Data across a range of measures back the Fed's premise of low and steady
inflation and "gives me confidence that the pick-up is more durable," Dolmas
said. After years of below-target inflation, since mid-2017 the Fed's 2% target
has been within reach, according to core measures like the trimmed mean rate and
confirmed by the survey responses of manufacturers and anecdotal evidence from
business contacts.
     Dolmas said he isn't concerned about data showing inflation has weakened
since July. In September, core CPI increased at a slower-than-expected annual
rate of 2.2%, the same as in August. CPI typically runs a few tenths higher than
personal consumption expenditures inflation.
     Dolmas expects the September PCI price index to come in on the softer side
but he said he won't read a lot into the numbers because they've been driven by
volatility in core goods prices, namely apparel in August and used cars in
September. The trimmed mean PCE was an annualized 1.5% in August, down from 2.0%
a month earlier.
     More telling are three of the largest and least volatile components of core
services prices: rent, owners' equivalent rent and the price of dining out,
which rose at a 3.3% annualized rate in August. Those categories are "the most
informative about core services index, and that has been rock solid, growing at
a rate of around 3.2% to 3.3% on a 12-month basis," Dolmas said.
     Over six months through August, the trimmed mean rate was 1.9%, slightly
higher than headline PCE inflation at 1.7% and PCE excluding food and energy at
1.8% over the same period. The 12-month trimmed mean was 2.0%, matching the PCE
excluding food and energy rate. The September PCE update is due Oct. 29.
     --TARIFFS EFFECT
     New tariffs and escalating trade tensions will likely cause price increases
to accelerate temporarily, but pinpointing the effect and their timing is
difficult, Dolmas said.
     So far, commodity price hikes in the wake of steel and aluminum tariffs
have been moderate with the strong dollar acting as a counterweight. The latest
round of tariffs on Chinese goods deal with many intermediate inputs, so much
depends on how domestic producers respond.
     "It's going to be really challenging to identify exactly those effects.
But, in any case, they're likely," Dolmas said.
     On the other hand, it is important to recognize that their effect on
inflation would be "purely transitory," Dolmas said. Prices might not all go up
at once, so it could play out over a period of several quarters, but "once
that's done, that's done. It doesn't contribute to inflation beyond that
transitory burst."
     --ANCHORED EXPECTATIONS
     While it's likely that the responsiveness of inflation to resource
utilization has weakened over the past few decades, that Phillips Curve
relationship nonetheless still exists, Dolmas said.
     The strong labor market and robust GDP growth could set off worries that
the economy will push past 2% inflation, but the Fed's success in convincing
consumers and businesses that it will act forcefully to bring inflation to 2%
makes it more likely that inflation will stay near that level.
     "Past episodes of sustained pick-ups in inflation have had to do with
shifts in people's expectations about inflation," Dolmas said. Since the
mid-1990s and as central banks around the world made explicit their inflation
targets, "inflation expectations have become much more anchored."
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com
[TOPICS: MMUFE$,M$U$$$]

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