The Federal Reserve’s updated economic projections this week appeared to incorporate an assumption that raised eyebrows: inflation would prove resurgent at the end of this year.
The quarterly projections showed Fed officials now expect so-called core inflation—which excludes food and energy—to end this year around 4.8%, up from the 4.5% figure they forecast in September. Yet that number looks much too high to Wall Street economists following a surprisingly-soft Labor Department release on consumer prices Tuesday, even though Chair Jerome Powell said it was reflected in the projections.
It’s an important question because Powell specifically cited the higher “jump-off” point for inflation this year as one reason for the surprising upgrade to where Fed officials see prices at the end of 2023. That outlook, in turn, led to a hefty upward revision to their projected path for interest rates.
So the next two inflation reports will be make-or-break.
“To reach their 2022 forecast, implicitly they have extremely strong December numbers for inflation written in,” said Alan Detmeister, an economist at UBS Securities.
Tuesday’s report showed the consumer price index, excluding food and energy, rose just 0.2% last month, below the median estimate in a Bloomberg survey. The Fed states its projections—and its 2% target—in terms of the Commerce Department’s personal consumption expenditures price index, and November data for that won’t be published until Dec. 23.
Even so, forecasters are quick to produce estimates for PCE inflation once the CPI data are published, because both measures utilize many of the same underlying sources of information.
Economists at JPMorgan, for example, estimate core PCE prices probably rose about 0.1% in November, based on the CPI report and another Labor Department report on producer prices.
In October, core PCE prices were up 0.2%. Putting together the actual October number with the estimated November number leaves a December number that would have to buck the downtrend of recent months in a big way.
In particular, a 0.1% increase in November would require a 0.7% jump in core prices in December for the Fed to hit its 4.8% number for the year. Even a sizable 0.4% increase in December might translate to just 4.6% for the annual figure.
While no one knows what the December data—which won’t be published until the end of January—will show, “you need a real story” to get to those kinds of numbers, said Steven Englander, the head of global G10 FX research and North America strategy for Standard Chartered Bank.
And given the way goods inflation has been cooling and housing inflation is getting closer to decelerating, “if Powell thought that that was going to happen, I think it would have been incumbent for him to say, don’t be misled because December’s going to be a whopper,” Englander said.