Core Inflation to Rise In 2018

Inflation will be 2.1% in 2018, about the same as in 2017, but the composition will be different. Energy prices rose 8% this year as rising crude oil prices spurred gasoline and fuel oil prices, and electricity and natural gas prices trended up. Look for less energy-price inflation in 2018, while other categories pick up the slack.

Non-energy prices will grow at a 2.1% rate, compared with 2017’s 1.6%. As the economy grows, so does inflation. Housing will likely cost 3.5% more in 2018, compared with 2017’s 3.1% growth. Medical care will go up 2.6% (versus 1.7%), and all other services will cost 2.6% more (versus 1.8%). The prices of food and other goods will likely rise at a rate similar to 2017’s 1.5%.

November’s surge in gasoline and fuel oil prices led to 0.4% inflation for the month. Vehicles cost more as owners continued replacing hurricane-damaged cars and trucks. People had to pay more for shelter as well, probably because low housing inventory boosted home prices and rents. Medical care costs stayed flat because doctors’ offices are still having trouble maintaining fee increases. Volatile apparel prices and airfares dropped substantially in November.

Despite low inflation, the Federal Reserve will keep boosting interest rates. The Fed raised rates by a quarter-point this month and is expected to impose two or three more hikes in 2018. The central bank sees inflation running close enough to its 2% target to gradually bump up interest rates to a more typical range, after keeping rates extraordinarily low after the Great Recession.