US: Inflation looks poised to rise gradually over the remainder of the year - RBS

Research Team at RBS, notes that after remaining near zero for most of 2015, the US headline inflation rate moved up in late 2015 and, on a year/year basis, is now holding around 1%.

Key Quotes

“Excluding the transitory effects of food and energy, the core inflation rate has also firmed, from 1.3% in mid-2015 to 1.6% currently and looks poised to rise gradually over the remainder of the year. By the end of 2016, we look for the year/year core PCE deflator to reach 2%.

However, one of the important uncertainties the Fed faces is how quickly inflation will move back to its 2% target. Assuming oil prices do not resume their decline, the dollar does not rise substantially, and the labor market continues to strengthen, Yellen believes inflation will move up to 2% over the next one to two years.

However, the Fed is watchful of the renewed decline in some gauges of inflation expectations. In her June 6 speech, Yellen said, "if inflation expectations really are moving lower, that could call into question whether inflation will move back to 2 percent as quickly as I expect." In determining whether additional rate hikes are appropriate, the Fed will be watching both reported and expected inflation gauges.”