Inflation to remain below 2% for longer

The external deflationary pressure from the stronger dollar and lower commodity prices is persisting for longer than we expected. The lower profile for energy prices now means that headline inflation will remain around 1% for much of the year and won’t reach 2% until early 2017. Meanwhile, the dollar, which has now appreciated by 20% since the middle of 2014, is still keeping a tight lid on core goods inflation. Nevertheless, even though these external deflationary pressures will last a little longer than we initially believed, they will inevitably fade later this year and mounting domestic price pressures will push core inflation above the Fed’s 2% target.