U.S. inflation rate likely to reach 2 pct in 2017 on stronger economic activity and base effects

The preferred inflation measure of the U.S. Fed, the personal consumption expenditure (PCE) deflator, dropped in July to 0.8 percent year-on-year on the headline measure from 0.9 percent in June. The core measure, which strips energy and food, remained the same at 1.6 percent year-on-year and has hovered around the current level in 2016.

Thus, the headline and core measures both continue to be lower than the central bank’s 2 percent target rate. Stronger economic activity and base effects are expected to push both measures higher in the quarters ahead towards the 2 percent target rate in 2017, said Lloyds Bank in a research note.

Meanwhile, the U.S. Fed has refrained from hiking rates further so far in 2016 after raising rates in December 2015 for the first time in almost a decade. Some have repeated their statements that the next meeting in September remains ‘live’ given the tight labor market and expectations of a pickup in economic growth in the second half of 2016.

However, the recent weaker tone to the data and expectations of just gradual rise in inflation imply that the FOMC would hold off from a hike in September, according to Lloyds Bank. Meanwhile, the data have not been weak enough to derail the projection of a hike in December.

“We expect two further hikes in 2017”, added Lloyds Bank.