Just you wait, inflation is coming, a lot of Wall Street pros warn.
Maybe so. But it’s still far from clear that inflation will rise fast enough to force the Federal Reserve to raise interest rates four times in 2018 instead of three as previously expected.
After a January scare, inflation moderated in February. Worker wages grew more slowly and so did consumer prices.
Granted, the trend is still up. The consumer price index, for example, has risen 2.2% in the past 12 months and it’s not far off a six-year high. Rising prices of oil, homes and rent are largely to blame.
The long-run picture on inflation could also take a turn for the worse in March. The yearly rate of inflation could spike to 2.5% if the CPI increases as much as it did in February.
How come? Consumer prices fell sharply in March 2017 because of a weird plunge in the cost of wireless service. That’s kept the yearly rate of inflation looking rather tame despite the tightest labor market in years and rising prices for key staples such as shelter and energy.
“Okay, fine, but just wait until next month . . . That will be the rallying cry for those who have been sounding the inflation alarm bell,” contended Richard Moody, chief economist of Regions Financial.
But after that? Inflation is not assured to keep rising.
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For one thing, oil has stabilized early this year after a sharp runup in the second half of 2017. The cost of a barrel of crude sits near $60, down from nearly three-year peak of $66 in January.
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The cost of housing and rent is also rising more slowly. The 12-month increase in shelter slipped to 3.1% in February from 3.5% a year earlier. Home builders are ramping up construction of single-family homes and there’s been a surge in the number of rental units available.
Then there’s the surprising weakness in medical costs, another major household expense. They have risen just 1.8% in the past 12 months — half as fast compared to a year earlier.
Car prices have also stalled. They fell 0.5% in February and are down 1.5% over the past year. They haven’t fallen that much since the tail end of the Great Recession in 2009.
“New and used-car prices returned to the deflation territory, as expected, as the post-hurricane surge in demand appears to have faded away,” economist Pooja Sriram of Barclays wrote in a note to clients.
The surprising plunge in telecommunications prices last year, meanwhile, has been countered in early 2018 by unusually large increases in the cost of clothes and auto insurance that simply aren’t sustainable.
The cost of auto insurance, for example, has hit a nine-year high. And apparel prices soared by more than 1% in both January and February — the biggest back-to-back gains since 1990. The cost of clothes had fallen for three straight years until this sudden and seemingly inexplicable turnaround.
Add it all up and the forces pushing inflation higher appear to be losing some steam.
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“The details of the report, away from a large boost from apparel prices, were soft, reinforcing our view that the underlying pace of inflation has not materially picked up,” economist Andrew Hollenhorst of Citibank wrote.