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What will inflation look like in 2019?

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11/27/2018 | 10:54am EDT

2019 is fast approaching and many analysts are starting to come up with their economic forecast for the coming year. One topic that is on everybody’s mind is inflation, and how it will affect the Fed’s monetary policy.

The Fed has decided at its latest meeting earlier in November to keep its interest rates unchanged, but reiterated that it will gradually raise them in the future, given the strength of the economy. It left them in the range of 2% to 2.25% for now.

This reinforced the markets' view that a fourth quarter-percentage-point (0.25%) increase in the cost of money for 2018 is on the horizon at the next monetary meeting on December 19. While the American economy grew at a fast rate lately, the Fed wants to avoid overheating and the risk of a resurgence of inflation, which so far is only 2%, right on target, which the Fed considers ideal for the economy.

This is what it calls a “Goldilocks state”, neither too hot or cold. But the Goldilocks scenario could change in 2019 and cause the Fed to either quicken its pace of policy tightening or ease up on the brakes. In a new report, Wells Fargo looked at the factors it views as most likely to lead inflation away from its current spot of 2.0%.
It highlights that the United States is on course for one of the best years of the current expansion. “Given inflation’s tendency to lag growth, the economy’s impressive performance this year may only now be starting to rev up inflation.” In addition, job openings are near record highs, while finding qualified labor is small businesses’ single most important problem. Wages are rising as a result.

The report also mentions Trump’s tariffs on about $300 billion worth of goods, which are pushing up production costs for U.S. firms and allowing others to raise prices.

However, there are some factors that tend to reduce inflation:  oil has tumbled more than 20% since early October and the dollar remains strong.

Another downside risk mentioned in the report is housing. Affordability concerns have come to the forefront after years of prices outpacing income growth. Home sales have fallen over the past six months as a result, and price growth is beginning to moderate.

According to Wells Fargo, all these factors should maintain inflation more or less at its current pace. “The pullback in commodity prices, a strong dollar, retaliatory tariffs and the housing slowdown are also expected to keep domestic inflation pressures from generating a clear breakout in inflation. Therefore, while core inflation is likely to stray a bit above the FOMC’s target in 2019, we expect the committee to slowly raise rates a few more times next year”, the reports concludes.

Romain Fournier
© MarketScreener.com 2018
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