Gradual rise in US underlying inflationary pressures expected

The US Fed officials, in updated forecasts, kept their projections of a slow increase in underlying inflationary pressures. The US Fed projects core deflator to accelerate to 1.7 percent in the last quarter of this year. It kept its projections unchanged for Q4 2017 at 1.9 percent.

US inflation in May accelerated to 2.2 percent year-on-year, mainly due to core services inflation that rose to a post-recession high of 3.2 percent year-on-year. Meanwhile, core goods inflation continued to be in negative territory at -0.5 percent.

Labor market developments are expected to continue driving services inflation, said Lloyds Bank in a research report. Average hourly growth appears to have remained range-bound. The recent figures were at 2.5 percent year-on-year in May. The core PCE deflator, which is the Fed’s preferred inflation measure, was stable at 1.6 percent in April.

After the May’s subdued payrolls data, the US Fed kept the interest rates unchanged at a range of 0.25 percent-0.5 percent. According to the median ‘dot plot’ chart, officials are still likely to hike rates twice in 2016.

However, conviction levels were lower than March’s projections as six members out of 17 see just one rate hike. Furthermore, the earlier median outlook of four raises in 2017 was lowered to three, whereas the longer-term anticipated level of ‘neutral’ interest rates was also lowered to 3 percent from 3.25 percent.

In all, the US Fed continues to be biased towards tightening policy; however, it is not in a hurry to do so. It would keep a close watch on upcoming economic data. If growth in employment rebounds again in June and other economic data also improve in the coming months, the FOMC meeting in September might see a rate hike, according to Lloyds Bank.