Most policy makers and economists forecast inflation will stay low in the year ahead. But predictions don’t always come true.
By Justin Lahart
The days when worries over the danger of too-high inflation were a regular feature of economic commentary are long gone.
That doesn’t mean the possibility of inflation running hotter-than-expected should be dismissed entirely.
The Labor Department on Tuesday reported that consumer prices rose 0.2% in December from November, falling shy of the 0.3% economists surveyed by The Wall Street Journal expected and putting them 2.3% above their year-earlier level.
Prices excluding food and energy items—the so-called core economists watch to track inflation’s trend—rose 0.1% on the month, putting them up 2.3% from a year earlier.
Since the Federal Reserve’s preferred inflation measure, from the Commerce Department, runs cooler than the Labor Department’s, it is likely that inflation once again finished the year short of the central bank’s 2% target.
Fed policy makers’ projections show that on balance they don’t expect inflation to reach 2% until next year.
Just because economists have been struggling to understand why inflation has been so low doesn’t mean that inflation can’t pick up. Photo: David Paul Morris/Bloomberg News
It is a remarkable turn, given that the unemployment rate, at 3.5%, is well below the 4.1% Fed policy makers believe is sustainable.
With the traditional, inverse relationship between unemployment and inflation seemingly broken, many officials, and economists, too, have defaulted to an expectation that inflation will remain persistently cool.
But Federal Reserve Bank of Boston President Eric Rosengren struck a lonely chord in a speech Monday, suggesting that there remains a danger inflation could accelerate. Wage growth, while still moderate, has been picking up, he pointed out, and with corporate profit margins under pressure lately, companies’ ability to absorb rising labor costs without raising prices may be limited.
Moreover, just because economists have been struggling to understand why inflation has been so low doesn’t mean that inflation can’t pick up. Instead, their struggle to forecast inflation may simply show that inflation is hard to predict, and might end up doing something unexpected. Indeed, in the early 1960s inflation was running even cooler than it is today. Policy makers assumed that would continue and rather suddenly found out they were wrong.
None of that means inflation is about to become a big problem or that forecasts that it will stay low won’t come true. But investors should be open to the possibility that inflation might not do what everyone thinks it will.
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