Inflation the theme for 2016?

27 December,, London – When the Committee increased US interest rates on December 16th by 25bp, it did so with inflation running below its 2 percent target.

Inflation the theme for 2016?

The Fed’s latest preferred inflation reading – core PCE data, which excludes food and gas, showed that the prices increased by about 1.3% over the prior year in November.

Nevertheless, the core CPI, commonly referred as inflation, rose 2% in November the highest print since July 2012 and a proof when looking past the deflationary influence of a strong USD and a collapse in commodity prices, inflation is picking up.

In a press conference last Wednesday after the rate hike, Fed Chair Janet Yellen made clear that the Committee believes economic inflation will return to its target over the “medium-term,” though the medium term might not be until 2018.

Consider reading: Morgan Stanley: Global GDP to shrink 5%

In a note to currency investors, Goldman Sachs examined the outlook for inflation in 2016 and forecaster four interest rate hikes from the Fed as inflationary pressure increases.

Certainly a strong USD and a continued devaluation in commodity prices, in turn resulting in cheaper energy, has surprised the Fed and the stabilising global economy in 2015.

Yet 70 percent of goods included in the core inflation basket, which is what the US central bank focuses on, are tied to services that Goldman Sachs note are “for the most part insensitive to global pricing pressures.”

In other words, the US inflation might not be for the Fed to control. It will increase along with the global outlook.

Although this might look disappointing. The reality is that the US unemployment drifts towards 2007 lows of 4.5% and the driving force of the US economy, consumers, is as strong as it was in a decade.

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