The October rise in the U.S. core inflation support the signal from our BlackRock Inflation GPS that underlying prices are bottoming out around the current annual rate of 1.8% and should be back at 2% in early 2018. This indicates that the Federal Reserve (Fed) remains on track to lift interest rates in the months ahead. We see scope for monetary policy divergence to feed a further moderate rise in the U.S. dollar in coming months as U.S. yields climb relative to eurozone counterparts.
We launched the BlackRock Inflation GPS in September to help our investors see through the noise of monthly inflation releases and to give a guide on the near-term outlook for core consumer prices. The Inflation GPS, which was developed with BlackRock’s Scientific Active Equity team, incorporates big data on price trends and a daily “nowcast” of inflation-related statistics into an augmented Phillips Curve framework.
As detailed in our September macro outlook, the Inflation GPS signals that the U.S. core Consumer Price Index (CPI) should reverse some of this year’s surprising slowdown. We expect some of the major one-off drops—especially the sharp fall in wireless telephone costs due to changes in major pricing plans—to wash out of the data in coming months and lift the annual rate of core inflation to the Fed’s 2% target, although base effects will keep the data noisy. Today’s October CPI report, showing a 0.2% monthly increase in core prices, reinforces this view.
This CPI release was the last before the Fed’s December meeting at which it is expected to raise interest rates for the fifth time in this cycle to 1.25%–1.5%. We see scope for the Fed to raise rates a few more times in 2018.
Listen to Kate Moore discuss the uncertain path forward for tax reform in Washington in our latest episode of our podcast, The Bid.