Inflation set to rebound

Inflation is currently being held down by the impact of falling commodity prices and the stronger dollar but, as those deflationary forces fade next year, we expect rising domestic price pressures to push inflation back towards the Fed’s 2% target. Admittedly, the latest downward leg in energy prices will extend that deflationary pressure for a little longer, but the annual rate of headline inflation will still rebound sharply over the next few months, as the even bigger declines in prices last year drop out of the calculation. Even with the deflationary effects of the stronger dollar, core inflation is already getting closer to the Fed’s target.