Inflation may still be far off target, but rates will soon be rising

September 15, 2015

USA/Inflation may be far off target but economists are convinced the United States Federal Reserve and the Bank of England will soon begin raising rates from near zero – with the Fed poised to act as soon as Thursday.

Tumbling oil prices and far-from-spectacular domestic demand – as well as declining appetite for raw materials from a less-hungry China – has sent global inflation spiralling downwards.

There was no overall rise in prices from a year ago in Britain last month. Just a 0.2 percent rise is expected from the U.S. on Wednesday.

While economists are generally convinced the Fed will act this year they are less sure as to just how soon. A Reuters poll late last week pegged September for the first increase to the fed funds rate in nearly a decade – but only just. In that survey, 39 of the 72 economists said rates would rise on Thursday, but the median likelihood from a slightly smaller sample was 50-50.

“It’s a close call” for September, wrote Michala Marcussen, global head of economics at Societe Generale, in a note. “But, if they don’t, then we expect them to use language that points strongly to an October hike.”

Just about every forecaster is taking the same view. All but four of 76 economists had an increase pencilled in by the end of the year.

U.S. inflation numbers on Wednesday will be the last major data to be released before the Fed’s decision and are likely to show barely any inflationary pressure in the world’s largest economy.

Reuters polls giving predictions about U.S. CPI data are usually pretty accurate. If not spot on, the medians have only been 0.1 percentage point out in the last eight polls:

U.S. CPI YY Reuters poll
Actual Median High Low
December 0.8 0.7 1.3 0.3
January -0.1 -0.1 0.8 -0.5
February 0.0 -0.1 0.2 -0.9
March -0.1 0.0 0.2 -0.2
April -0.2 -0.1 0.2 -0.7
May 0.0 0.0 0.4 -0.3
June 0.1 0.1 0.3 -0.1
July 0.2 0.2 0.4 0.0
August 0.2 0.4 0.1

 

The medians and forecast highs and lows have been getting progressively higher.

In the UK, inflation is not expected to reach the BoE’s 2 percent target until 2017 but medians still show British interest rates rising from their record low of 0.5 percent in early 2016.

“We expect headline inflation to pick up to around 1 percent at the turn of the year (as oil price effects drop out), before gradually returning to 2 percent as domestic cost pressures intensify. Our view is that this pattern of price growth will allow the Bank of England to begin undertaking its ‘gradual and limited’ interest rate rises next year, starting in Q1,” said Chris Hare, an economist at Investec.

“Today’s release has left that view unchanged.”

– Additional reporting by Rahul Karunakar

 

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