The FOMC’s statement on inflation
The FOMC’s (Federal Open Market Committee) March statement was released on Wednesday, March 21, 2018, and the outlook for the closely watched inflation remained muted. The statement indicated that on a 12-month basis, both inflation (CPI) and core inflation (which excludes food and energy) have continued to be below the 2% target rate. The committee felt that the survey-based measures of inflation (TIP) remained unchanged, while the market-based measures of inflation have increased in recent months. The committee expects inflation (VTIP) to increase in the coming months and stabilize near the 2% target in the near term, while risks to this outlook remain roughly balanced.
Projection changes for inflation
The summary of economic projections released along with the FOMC statement indicated minimal changes to the inflation growth outlook. Longer run inflation was projected at 2%, while the median expectation for inflation (SCHP) in 2018 was 1.9%. The median expectations for PCE (personal consumer expenditures) inflation for 2019 and 2020 were reported at 2% and 2.1%, respectively. These projections indicate a possible moderate inflation growth, but if the rate is at the 2% target rate, the Fed could continue its tightening cycle.
Outlook for inflation
One key point that the FOMC statement did not mention was the possibility of a trade war if the Trump administration moves ahead with the proposed tariffs. If these tariffs are imposed, it could lead to retaliatory measures from trading partners, which in turn could lead to higher costs for consumers, thereby increasing inflation (IPE) at a higher-than-expected rate. We don’t know if or how the trade war fears could materialize, but for the time being, the outlook remains positive for inflation. Even without any external push to prices, improved consumer sentiment and a lower unemployment rate could help the inflation rate reach the 2% target. In the next part of this series, we’ll analyze the Fed’s view on the employment market.
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