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Economic Forecasts

Drop in Prices Not Likely to Delay Fed Rate Hike

Kiplinger's latest forecast on inflation

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Inflation 2.5% in '17, up from 2.1% in '16 More »
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Trade deficit Widening 4% in '17, after nearly flat '16 More »

The Federal Reserve is likely to regard the drop in prices reported in March as temporary. Gasoline prices are already rebounding, and the large drop in apparel prices is not likely to be repeated. Therefore, this one-month downturn shouldn’t affect the Fed’s plans for future interest rate hikes.

Overall inflation should rise to an annual rate of 2.3% by the end of 2017, from 2.1% at the close of last year. A rebound in energy prices from 2016’s depressed levels will cause the majority of the pickup. The recent dip in gasoline prices will likely be followed by more increases later in the year.

Core inflation, which excludes food and energy, will also end 2017 at a 2.3% annual rate, slightly higher than 2016’s 2.2% rate. Housing and medical care will account for most of this rise. Other goods and services are also starting to show modestly faster price increases. Balancing this out will be a decline in the prices of used cars as more autos that were leased a few years ago end up on dealers’ lots.

Overall prices of groceries will be nearly flat this year, but the cost of dining out will rise. Expect beef, fruit and vegetable prices to slip, but dairy and chicken prices to start rising after declines in 2016. Greater competition in the grocery business this year plus lower prices for imported food will tamp down what you shell out at the supermarket, whereas restaurant meal prices will rise at least as quickly as the general inflation rate. Restaurant costs are determined more by workers’ wages than the cost of food. And wages will rise faster in 2017 than they have recently, as the labor market in general tightens.

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Health care inflation will ease. Prices of medical services should rise by 2.8% in 2017, down a bit from the 3.9% increase in 2016. Prices at physician practices will rise more slowly than at hospitals this year. Still, health insurance costs should rise by 4% to 6% for employer plans, and up to 9% for the Obamacare exchange plans. Prescription-drug price inflation will ease from 2016’s 6% rate, but will stay at an elevated level.

The cost of keeping a roof over your head will rise by 3.3% this year. Shortages of homes for sale in many metro areas will keep upward pressure on rents and home prices.

SEE ALSO: Print-Ready Consumer Price Index Chart

Source: Department of Labor, Inflation Data