Is core inflation about to surprise on the upside?

The rebound in the three-month annualised rate of core PCE inflation to a seven-year high of 2.5% in June, together with evidence that unit labour costs have been rising more rapidly than thought, suggests that core inflation could surprise on the upside in the second half of this year. We now expect core CPI inflation to remain steady at 2.1%, with core PCE inflation rebounding to 1.8% by year-end.