U.S. inflation likely to rise in short-term and moderate in medium term

Inflation in the U.S. is expected to rise in 2018. The negative surprises to inflation in 2017, which were mainly due to special factors such as a large drop in the price of telecommunication, are expected to be reversed in 2018, noted DNB Bank in a research report. Therefore, a confidential rise in inflation should be anticipated in this spring. If the monthly rise in core PCE-inflation from September to January continues, the annual inflation rate would jump to 2 percent in May from February’s 1.5 percent. Inflation is likely to slightly overshoot the target rate of 2 percent in the second half of this year. Impacts of the weakening of the USD might contribute to the rise in inflation short-term, stated DNB Bank.

Meanwhile, GDP-growth is expected to be boosted by a more expansionary fiscal policy in 2018 and in 2019. With growth well above trend already, a further decline in jobless rate is expected to take place. In spite of the fact that the Phillips Curve is flatter than before and there appears to be still more resources available outside the labor force, a tighter labor market would likely put some more pressure on wages and indirectly on inflation. In the medium term, inflation in the U.S. is expected to be moderate at around 2.25 percent to 2.5 percent, said DNB Bank.

With inflation rising, the FOMC would be more confident in hiking rates further towards, and finally above the neutral level, estimated at 2.75 percent.

“Our forecasts call for four hikes this year and the same number of hikes in 2019. We do not believe that the FOMC will signal so many hikes at this week’s meeting already, but that the dot-chart will be adjusted upwards further at the June-meeting”, added DNB Bank.

At 20:00 GMT the FxWirePro's Hourly Strength Index of US Dollar was bullish at 94.8698. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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