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Economic Forecasts

Weaker Inflation Likely to Stick Around

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 1.4% in '17, down from 2.1% in '16 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 »

Inflation is lower than expected this year, and the contributing factors will likely persist. The drop in crude oil prices has put off, perhaps indefinitely, any significant pickup in gasoline prices. 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 down prices for used car as well. And although hospital services costs 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.

Some prices are spiking, however: Auto insurance premiums, TV service and prescription drugs are rising sharply. Drug prices look to be trending upward again, after nine months of relative stability that saw patents expire for more drugs than usual.

See Also: All Our Economic Outlooks

Expect total inflation to be 1.4% in 2017, well below 2016’s 2.1% rate. Core inflation, which excludes food and energy costs, should be 1.7% in 2017, down from 2016’s 2.2%. Lower medical care inflation, which should be about 1.9% in 2017, down from 3.8% in 2016, explains most of the slower growth. Housing costs are likely to rise 3.0% in 2017, because tight inventory is pushing up home prices, while rents are going up more slowly.

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Despite the better price news, the Federal Reserve will continue raising interest rates. The Fed is likely to reduce its purchases of Treasuries and mortgage-backed securities at its September meeting, and raise rates a quarter point at its December meeting. There is a chance the Fed may delay amid low inflation, but more likely it will push ahead because tightness in the labor market could drive up wages and prices.

SEE ALSO: Print-Ready Consumer Price Index Chart

Source: Department of Labor, Inflation Data