Inflation On The Rise

Inflation is growing, but at a moderate, not runaway, pace. It is normal for inflation to pick up as the economy expands. The strong January report was pushed up by unique factors that are not likely to occur again, such as unusually cold weather in the Southeast and the end of holiday discounts for clothing.

January’s prices rose a significant 0.5% on the strength of gasoline, apparel and hospital costs. Gasoline prices picked up as crude oil prices rose in January but should drop in February, matching oil’s price decline. Apparel prices rose as deep holiday discounts disappeared, but will likely come down again. Hospital costs continued their strong run.

A surge in restaurant prices may be the result of widespread hikes in the minimum wage. Prices of used cars and trucks continued their post-hurricane run-up. New-car leases have become more expensive as more customers forgo buying to afford expensive SUVs. Finally, auto insurance rates are climbing substantially as the industry responds to higher costs for repairing expensive gadgets on newer vehicles.

Inflation will be 2.6% in 2018, compared with 2017’s 2.1%, reflecting both higher gasoline prices and overall higher prices. Increasing gas prices, driven by more expensive crude oil, will account for most of 2018’s inflation boost. But other goods and services will be more expensive, too.

Prices for everything except food and energy will grow 2.4%, compared with last year’s 1.7%. Housing will likely cost 3.3% more in 2018, compared with 2017’s 3.1%; medical care will go up 2.8% versus 1.6%; all other services will cost 2.8% more, compared with 1.8%. Food prices will likely increase 1.7%, close to last year’s 1.6%.

Higher inflation means that the Federal Reserve will keep boosting interest rates. The Fed raised rates by a quarter-point this month and is expected to impose three more hikes in 2018. If inflation keeps exerting more pressure, central bankers could also raise rates in September to go along with likely hikes in March, June and December. But we don’t think they will because we expect inflation to stabilize this year.