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Economic Forecasts

Moderate Inflation Will Return

Kiplinger's latest forecast on inflation

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GDP 2.1% pace in '17, 2.4% in '18 More »
Jobs Hiring pace should slow to 175K/month by end '17 More »
Interest rates 10-year T-notes at 2.4% by end '17 More »
Inflation 2.0% in '18, up from 1.4% in '17 More »
Business spending Rising 3%-4% in '17, after flat '16 More »
Energy Crude trading from $40 to $45 per barrel in December More »
Housing Existing-home sales up 3.5% in '17 More »
Retail sales Growing 3.5% in '17 (excluding gas) More »
Trade deficit Widening 4% in '17, after nearly flat '16 More »

Strong August inflation was likely temporary. Energy prices bumped up because of gasoline supply disruptions from Hurricane Harvey’s strikes on Texas, but these should be resolved before the end of the year and are unlikely to remain elevated. The surge in shelter costs was also probably short-lived and should be averaged in with July’s unusually small bump.

Inflation is lower than expected this year, and the contributing factors are expected to persist. Big inventories of new vehicles will lead to higher manufacturer price incentives in the second half of this year. A glut of cars coming off lease is driving used-car prices down as well. And although the costs of hospital services are rising unabated, private physicians’ services costs are actually down from the end of 2016. A developing price war caused by new entrants in both the online and retail grocery market will likely cap food costs. And apparel prices are under pressure because of e-commerce vendors.

See Also: All Our Economic Outlooks

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

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Expect total inflation to be 2.0% in 2018, above the 1.4% rate we see closing 2017. Core inflation, which excludes food and energy costs, should be 2.0% next year. A one-time decline in energy prices earlier this year lowers our core inflation estimate for 2017 to 1.7%. Energy prices are likely to wander slightly upwards in 2018. Medical-care inflation is unusually low and will close out the year at 2.0%, probably rising slightly to 2.6% next year. Housing costs will go a little north in 2018 as tight inventory keeps pushing up home prices.

Despite low inflation, the Federal Reserve will continue raising interest rates. It will reduce its purchases of Treasuries and mortgage-backed securities beginning next month and is likely to raise rates a quarter-point at its December meeting. The Fed sees inflation running close enough to its 2% target to forge ahead with its rate and balance-sheet normalization program.

SEE ALSO: Print-Ready Consumer Price Index Chart

Source: Department of Labor, Inflation Data