Using our top-down and bottom-up core PCE models, we project that both macroeconomic fundamentals as well as sector-specific factors are likely to push core inflation meaningfully higher this year.
We highlight three key drivers of the core PCE acceleration to 1.8% by end-2018 in our forecast: a 0.15pp boost from the pass-through from higher energy prices and a weaker dollar, a 0.1-0.15pp lift from a tighter labor market, and a 0.1pp jump from the Verizon effect dropping out.
We … now see the risks to our core PCE forecast of 1.8% by end-2018 as moderately tilted to the upside.
CR Note: The central tendency for core inflation in the December FOMC projections was 1.7% to 1.9%. So this is in line with current FOMC projections, and still below the Fed target of 2%.