February 19, 2019 — Inflation Pressure


Core inflation finished out 2018 at 2.2 percent, 40 basis points higher than where it was 12-months earlier.  The expectations are for this acceleration in inflation to continue into 2019 as a result of above-trend economic growth and growing wage pressures. Labor scarcity has finally intensified and it is affecting wages. Should inflation in 2019 begin to ramp up, the Fed should return to tightening in the second half of the year.

Wages are up by 3.2 percent year over year, and with labor cost pressures rising over 3 percent there arises an inconsistency with a 2 percent core inflation.  It’s likely under these conditions, inflation will start to move.  Even though January inflation was unchanged, it was attributable to a 5 percent fall in gasoline prices.  Going forward, CPI should be lifted by fading dollar appreciation that has held the price of goods in check.

Analysts believe the relatively strong economy, as well as cost-push and demand-pull pressures will bump consumer inflation above the 2 percent target in the medium term. This would lead into the Fed moving on rates again in the second half of the year.