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MNI INTERVIEW: No Sign of Slowing in Inflation - Fed's Dolmas


U.S. inflation data show little sign of slowing from a torrid pace in May, with no immediate relief from Fed tightening for key core services components like shelter and dining out costs, Federal Reserve Bank of Dallas economist Jim Dolmas told MNI.

The Dallas Fed Trimmed Mean PCE inflation rate, a less volatile gauge of price pressures and a better predictor of future price changes, points to an underlying inflation rate of between 4% and 5%, said Dolmas, who developed and maintains the measure.

Fed officials are likely to support repeating June's aggressive 75 basis point rate hike later this month to tackle soaring inflation. Headline PCE inflation rose 6.3% in May, unchanged from April, while core PCE inflation slowed to 4.7% from 4.9% a month earlier. (See: MNI INTERVIEW: US Inflation Has Likely Peaked-Fed's Andolfatto)

"There's nothing I see in the data that makes me optimistic that things are starting to moderate," he said. "There are developments outside of the inflation data where we see markets starting to cool off a little bit -- like commodities prices going down -- so there are positive signs, but I'm not seeing a reflection of that moderation as yet."


Dolmas expects rent and owners' equivalent rent inflation to accelerate to 7% by early next year from just above 5% in May, he said, adding the service sector labor market also remains extremely tight, driving wage pressures that play an important role in dining out prices, said Dolmas.

Those three categories are the largest and least volatile components of core services -- together they make up 20% of the PCE inflation basket -- recorded a one-month annualized inflation rate of 8% in May, or 6% on a 12-month basis, the highest in decades.

But there's room for price growth to accelerate even as the Fed hikes interest rates briskly, Dolmas said.

"Housing activity cooled down a lot but prices so far less so," he said. "It’s a slow process and will take a while to filter through to rents and OER."


As for wages, "we’re seeing tiny evidence of cooling -- job openings came down a little bit -- but the labor market still looks really tight. That's also something that's not going to shift on a dime," Dolmas said.

A wage-price spiral as workers demand higher pay to keep up with rising prices is a key risk for the U.S. economy when inflation is so high, and the Dallas Fed has been looking at a broad set of inflation expectation measures more closely in recent months.

"If long run expectations go materially higher, then that would start to be worrisome. So far they haven’t," he said. "Short-run expectations have gone up much more than the long-run, and in some sense that’s a confirmation of Fed credibility."

MNI Washington Bureau | +1 202-371-2121 |
MNI Washington Bureau | +1 202-371-2121 |

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