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

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