UBS: Here's Why Inflation Might Finally Be Coming

UBS economist Maury Harris argues that the age of disinflation might finally be coming.

Currently, the core PCE deflator, the Fed’s presumed preferred measure of inflation, is running at just 1.2% y/y, well below the FOMC’s 2% target. This low level of inflation provides Yellen with leeway to keep policy accommodative (a description that would fit policy even after a taper). However, it seems unlikely that inflation will remain this low much longer. The y/y percentage change in the core PCE deflator has decelerated by 52bps through September.

That deceleration has been the result of sharp drops in medical goods, health care services and financial services inflation. Combined, these account for almost all the deceleration witnessed over the last year. However, these now seem to be showing signs of re-acceleration. From June to September, the 3-month annualized rate of change for medical goods inflation has jumped from -0.4% to +4.8%, health care services have risen from -0.5% to +1.3%, and financial services inflation has bounced from +0.2% to +2.6%. We expect core PCE inflation will end 2014 at 1.9%, almost on the FOMC’s target.

The pickup in health care inflation is particularly interesting to watch, since the slowing pace of health care inflation in recent years has been a huge story. If that effect starts to fade it will be an unfortunate sign that that issue isn’t going away.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.