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Economic Forecasts

Strong Dollar Will Keep Inflation Under Control

Kiplinger's latest forecast on inflation

GDP 2.1% growth in ’17, following 1.6% in ’16 More »
Jobs Hiring pace should slow to 160K/month in '17 More »
Interest rates 10-year T-notes at 3% by end '17 More »
Inflation 2.5% in '17, up from 2.1% in '16 More »
Business spending Rising 3%-4% in ’17, after flat ’16 More »
Energy Crude oil trading from $55 to $60 per barrel in May More »
Housing Single-family starts up 10% in '17 More »
Retail sales Growing 4.2% in '17 (excluding gas) More »
Trade deficit Widening 4% in '17, after nearly flat '16 More »

Overall inflation should rise to an annual rate of 2.5% by the end of 2017, from 2.1% at the close of last year. A rebound in energy prices from 2016’s depressed levels will cause the majority of the pickup. Energy price increases in January have already accounted for much of the expected inflation bump in 2017. The recent dip in gasoline prices will likely be followed by more increases later in the year.

Core inflation, which excludes food and energy, will also end 2017 at a 2.5% annual rate, a little higher than 2016’s 2.2% rate. Housing and medical care will account for most of this rise. But other goods and services are also starting to show faster price increases: New vehicles, vehicle leasing and pay TV services.

See Also: All Our Economic Outlooks

The pickup in the core inflation rate, spurred in part by wage increases, will likely prod the Federal Reserve to raise interest rates twice more this year after its March hike, by a quarter of a percentage point at a time.

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The strength of the U.S. dollar will help limit core inflation in 2017. Prices of most imported commodities will likely decline modestly. Prices of many domestically produced items will also be constrained by greater competition from cheap imports.

Overall prices of groceries will be nearly flat next year, but the cost of dining out will rise. Expect beef, fruit and vegetable prices to slip but dairy and chicken prices to start rising after declines in 2016. Greater competition in the grocery business in 2017 plus lower prices for imported food will tamp down what you shell out at the supermarket, whereas prices of restaurant meals will rise at least as quickly as the general inflation rate. Restaurant costs are determined more by workers’ wages than by the cost of food. And wages will rise faster in 2017 than they have recently as the labor market in general tightens.

Health care inflation will ease a smidge. Prices of medical services should rise by 3% in 2017, down a bit from the 3.9% rate increase in 2016. Still, health insurance costs should rise by 4% to 6% for employer plans, and up to 9% for the Obamacare exchange plans. Prescription drug price inflation will ease from 2016’s 6% rate but will stay at an elevated level.

The cost of keeping a roof over your head will rise by 3.5% in 2017, about the same as in 2016. Shortages of homes for sale in many metro areas will keep upward pressure on rents and home prices.

SEE ALSO: Print-Ready Consumer Price Index Chart

Source: Department of Labor, Inflation Data