Has inflation reached its peak?
Analysts at Capital Economics think so. A new note from analysts at the firm says that core inflation has already peaked. The analysts posit that because labor costs and dollar appreciation have only grown modestly, core inflation is “unlikely to rise much further.”
The note, authored by Capital Economics Senior U.S. Economist Michael Pearce, explains that inflation has leveled off and that the same factors that signaled higher inflation 18 months ago now suggest that core inflation is going to hover around 2%.
From the note:
• Last year, the collapse in wireless phone service prices and increasing dominance of online retailers led many to conclude that a new wave of competitive pressures would prevent the Fed from ever hitting its 2% inflation target. We argued at the time that the weakness was largely transitory, a view vindicated by the subsequent surge in core CPI inflation to a decade-high of 2.4% this July. More recently, however, inflation has levelled off, and the same fundamentals that pointed to higher inflation 18 months ago now suggest that core inflation will remain close to 2%.
• Labour costs are unlikely to rise fast enough to push inflation meaningfully above target. Tightening labour market conditions are still putting gradual upward pressure on wages, but with annual productivity growth now running at close to 1.5%, annual wage growth would need to rise above 3.5% to push inflation much beyond target.
The analysts go on to forecast that core inflation will remain stable over the coming year or so, hovering between 2% and 2.5%. They noted that the Fed’s preferred PCE measure of core inflation is likely to remain close to the 2% target.
"By the middle of next year, however, we expect economic growth to fall below its potential rate, opening up some spare capacity in the economy. That is why we anticipate that core inflation will begin to drop back in 2020," the analysts write.
The analysts also note that the dollar now could be a drag on consumer goods pricing.
"The 10% appreciation of the dollar since April has already fed through to lower imported goods price inflation which, accounting for the usual lags, will feed through to weaker consumer goods price inflation over the coming year,” the analysts write.