Inflation Expected to Return

Strong September and August inflation was likely temporary. Energy prices bumped up because of gasoline supply disruptions from Hurricane Harvey’s impact on Texas, but that effect should be temporary. And price increases excluding energy remain modest.

Inflation is lower than expected this year, and the contributing factors are expected to persist. Energy prices are unlikely to remain elevated. Big inventories of new vehicles will lead to higher manufacturer price incentives during the rest of this year. A glut of cars coming off lease is driving down used-car prices, as well. And although costs for hospital services are rising unabatedly, costs for private physicians’ services are actually down from the end of 2016. A developing price war caused by new entrants in both the online and retail grocery markets will likely keep food costs under control. And apparel prices are under pressure because of e-commerce vendors undercutting brick-and-mortar merchants.

Some prices are spiking, however: auto insurance premiums and TV service, to name two.

Expect total inflation to be 2.0% in 2018, above the 1.6% rate we expect for 2017. Core inflation, which excludes food and energy costs, should also be 2.0% in 2018, after clocking in at 1.6% this year. Medical care inflation is unusually low and will close out 2017 at 1.9%, before rising to 2.6% next year. College tuition price increases have also been unusually modest, running at 2.1%. That trend will continue next year. Housing costs will still rise more than 3% in 2018, as tight inventory keeps pushing up home prices.

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