Liz Rappaport
Harris and many other economists are concerned about the forecast for inflation to continue to moderate, given high energy prices and prices of other commodities.
Another clue that inflation may not behave itself was the revision to the quarterly core personal consumption expenditures for the first quarter to 2.4% from 2.2%. "This does suggest that the current dip below the Fed's comfort zone in their preferred measure will likely prove transitory and that core inflation should remain quite stubborn in the period ahead, with real risk to the upside," writes Joe Brusuelas, chief economist at IDEAglobal. Imbedded in the personal spending/income data, Friday brings the monthly reading of the core PCE, which analysts believe will rise 0.1%. The forecast is for its year-over-year rate to be at 1.9%, below the top end of the Fed's so-called comfort zone and down from a recent peak of 2.4% in February. But "elevated" overall inflation may creep back into the FOMC statement if price pressures persist. The FOMC typically waits before highlighting high energy prices in the statement to ensure that the trend is not an anomaly, Harris notes. Indeed, investors should not necessarily gear up for rate cuts or a broader shift to neutral. Last spring and summer, after energy prices spiked sharply, the FOMC statements included "elevated prices of energy and other commodities" as potential forces "sustaining" or "adding" to inflation pressures. In the September 2006 statement, after energy prices had seen their peak, the Fed changed the language in its statements to note that "inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices." That language stayed there in the October and December meeting statements as well.
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