While merchandise has been an important driver of faster-than-expected disinflation in recent reports, services prices — an area Fed officials have been particularly focused on this year — have also largely been rising at a slower rate. That’s a big reason why forecasters are becoming more confident that the next six months will show overall inflation staying close to the Fed’s 2% target.
“The evidence suggests the economy can grow at a modest pace at the same time inflation comes down,” said Michael Gapen, the chief US economist at Bank of America. “That puts the Fed in the enviable position of likely being able to follow inflation down while not attenuating demand as much as they thought they’d have to.”
Even so, there are a few potential bumps in the road left to clear in the first quarter.
Lower stock prices helped drag financial services components of the price index lower in recent months, but fresh highs in the equity market since last week’s Fed meeting will probably push those components up again.
Increases in rent — the largest and most important component of the price indexes — are widely expected to moderate based on leading indicators, though the exact timing is unclear. There is also uncertainty around upcoming changes to seasonal adjustments of the monthly inflation data.
None of that, however, is enough to dissuade forecasters from rejecting the optimism implicit in the latest figures.
“I don’t know that we had actual empirical evidence to suggest that the ‘last mile’ would be hard, but people ran with that line,” Uruci said. “I mean, it sounded interesting.”
This article was provided by Bloomberg News.