Risks are increasing that disinflation has run its course and that U.S. top-line and core inflation will flatten out near 2.5%.
Already, the Federal Reserve has pushed back to 2027 its estimate of when it expects the personal consumption expenditure price index, its preferred gauge of inflation, to reach its target of 2%.
Inflation remains sticky, particularly in services and housing, and the New York Fed’s survey of consumer inflation expectations is converging on 3%.
All of these factors will play an important role as the Fed sets its policy rate this year.
The January PCE inflation report, to be released Friday, will most likely show a 0.3% top-line increase on the month and a 2.5% increase from one year ago. The core metric will most likely advance by 0.2% on the month and by 2.5% over the past year.
Read more of RSM’s insights on the economy and the middle market.
Turn-of-the-year price increases and the flattening out of goods disinflation, not to mention looming risks related to trade, imply that both the Fed and investors are a little like the characters in Samuel Beckett’s play “Waiting for Godot” when it comes to inflation reaching its 2% target.
Time will tell if the current policy path bears fruit or is an exercise in waiting on inflation normalization in an economy that has already absorbed a large exogenous shock and appears to be heading toward a trade price shock that may require a different response.
