On the other hand, the CPI for goods (prices of oil and other commodities purchased by consumers, which accounts for only one-third of overall CPI) sank along with oil prices from mid-2014 through early 2016. This kept the U.S. economy flirting with deflation (a prolonged period of falling wages and prices). Overall CPI posted a 2.1% year-over-year gain in mid-2014, but by January 2016 the overall CPI was just 1.4%, after dipping as low as -0.2% in mid-2015. Looking ahead to the remainder of 2016, if oil prices move up as we expect, the goods portion of CPI may increase by 2–3%; and if the pace of service sector inflation remains between 2% and 2.5%, overall CPI could accelerate quickly and may be well over 2.0% by year-end. By then, the Fed may have already raised rates again [Figure 4].

Week Ahead

Although market participants are already looking ahead to the upcoming March FOMC meeting, U.S. economic data (February reports on jobs, Institute for Supply Management [ISM] manufacturing and non-manufacturing, and vehicle sales), along with the Fed’s latest Beige Book (a qualitative assessment of economic conditions in each of the 12 Fed districts around the country) gives the market much to interpret this week as it waits for the Fed. In addition, appearances from New York Fed President Bill Dudley and San Francisco Fed President John Williams, both policy doves and voting members of the FOMC, and Dallas Fed President Robert Kaplan, a policy hawk, will provide plenty of fodder for market discussion.

While this week’s full slate of economic data for February will likely garner attention from market participants as they try to gauge the Fed’s next move, the market should probably continue to keep an eye on commodity prices as well, because a stabilization in prices near today’s levels may be just enough for the Fed to hit its inflation target for 2016.

John Canally is chief economic strategist for LPL Financial.
 

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