US: Can we get back to 2% core inflation? – BMO CM
Michael Gregory, Deputy Chief Economist at BMO Capital Markets, points out that October’s U.S. core CPI inflation rate nudged up to 1.8% y/y after a five-month run at 1.7% and starting the year at 2.3% (which matched the fastest rate in more than nine years), the fall to 1.7% by May marked the steepest non-recession-related deceleration in history (back to 1957).
“During the spring, we witnessed outsized price reductions for cellphone service plans and prescription drugs, but there were other items that exhibited notably lower or slower-growing prices as well. Indeed, there were so many of these idiosyncratic or one-time factors that there arose concerns that they could also be reflecting common factors, such as the impact of technology enabled disruption and changes to government health-care programs, that could prove to be more persistent. This would mean that even as select idiosyncratic factors fell out of the CPI calculation, core inflation could still remain too low.”
“One way to ameliorate these concerns would be for the shorter-term core inflation metrics to show signs of turning up the further we move away from the spring months, and this is what has been happening. The three-month change was 2.4% annualized in October, showing steady acceleration since May’s rare flat reading… a zero or negative outcome has occurred only twice before in the past 52 years. The six-month change was 1.8%, also showing steady acceleration since July’s 0.9% reading. The latter was the slowest in more than half a century, apart from several months in 2010.”
“What also is encouraging is that the acceleration has been broadbased. Take the 2.4 ppt acceleration in 3-month annualized core inflation since May, for example, shelter added about 0.8 ppts, core goods added 0.4 ppts and all other core services added 1.2 ppts. This raises the likelihood that core inflation can return to the 2% range early next year, particularly since the labour market has tightened further and the output gap has closed. However, things like technology-enabled disruption will probably continue to exert their disinflationary influences, keeping an effective check on core inflation readings much beyond the 2% range.”