Inflation No-Show Unlikely to Slow Fed Countdown to Rate Liftoff.

http://www.bloomberg.com/news/2014-12-31/inflation-no-show-unlikely-to-slow-fed-countdown-to-rate-liftoff.html

Economists are slashing U.S. inflation forecasts for 2015 as oil prices tumble. What’s not changing are predictions that theFederal Reserve will raise its benchmark interest rate anyway, probably around mid-year.

“We’re still saying June with risks to September,” said Michael Gapen, the New York-based chief U.S. economist for Barclays Plc. The Fed “can push rates higher in the middle of the year, even though visually that may look awkward if headline inflation is around zero.”

A stronger dollar, slowing global growth and cheaper oil are holding down costs for goods such as televisions and autos. Fed policy makers will probably look past that and see an improving labor market that will force employers to offer higher wages. Those costs will soon push up the price of such things as rent and restaurant meals, no matter what happens overseas, giving the central bank room to raise interest rates that have been stuck near zero for six years.

The personal consumption expenditure, or PCE, price index that’s the Fed’s preferred measure will be up 0.5 percent in the second quarter of 2015 from the same time this year, Barclays economists projected on Dec. 19. That’s down from a previous forecast of 1.2 percent. The consumer-price index, a separate gauge, is projected to show a small decline in the 12 months through June.

The Fed’s goal is for PCE inflation to climb around 2 percent a year.

Core prices, which exclude food and fuel, will rise 1.7 percent over the same period, according to the analysis by Barclays. That compares with a previously estimated 1.9 percent.

Dallas Fed

Regional Fed bank gauges are signaling inflation will be slow to accelerate. The Dallas Fed’s “trimmed mean” index, which eliminates the components in the PCE price gauge that show the biggest changes in any month, increased 1.6 percent in November from a year earlier, holding within the 1.6 percent to 1.7 percent range it’s been in since April.

Including food and fuel, the PCE price index rose 1.2 percent in the 12 months ended in November, the smallest gain since March, according to Commerce Department figures issued last week. The rule of thumb is that it will converge toward the trimmed mean reading over the next 12 months, pointing to a gradual pickup, according to the Dallas Fed’s report.

Goldman’s View

If it’s lower than 1.5 percent by June, as they predict, and wages show only a modest pickup, then the central bank will probably hold off, Jan Hatzius, Goldman’s New York-based chief economist, wrote in a Dec. 26 note. Should inflation undershoot even their below-consensus forecast, the Fed could wait until 2016, he said.

While Barclays’s Gapen acknowledges a rate liftoff could be delayed, the Fed has to make decisions based on where policy makers think the economy and inflation will be in 12 to 18 months, he said. And by June, the jobless rate will already be close to the 5.2 percent to 5.5 percent that Fed officials say is consistent with full employment, a sign bigger pay increases are in store.

“If you can run the domestic economy hot enough, then you can have services inflation that offsets a weak global backdrop,” said Gapen. “What we would be looking for is just broad-based services inflation related to wages.”