Economists foresee more rate moves, but weak wage gains restrain inflation

The Federal Reserve went more than nine years without raising interest rates before it acted last week, but there is already speculation about when another increase might occur.
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The Federal Reserve went more than nine years without raising interest rates before it acted last week, but there is already speculation about when another increase might occur.

Two-thirds of 120 economists that Reuters polled two days after the Fed increased its benchmark rate by a quarter of a percent predicted that the central bank will push rates up again, albeit slightly, within the next three months.

Fed chairman Janet Yellen said after the Dec. 16 rate announcement that future increases will be gradual as the central bank continues to monitor the health of the economy.

“Americans should realize that the Fed’s decision … reflects our confidence in the U.S. economy,” she said. “While things may be uneven across regions of the country and different industrial sectors, we see an economy that is on a path of sustainable improvement.”

Those improved prospects, however, have not been broad-based, and the slow pace of wage and price gains has kept inflation in check.

A Bloomberg report noted that the five-year recovery from the Great Recession has been disappointing for many. Household incomes remain lower than a decade ago — adjusted for inflation — and wages have climbed only sluggishly as people searching for jobs returned to work.

Hourly earnings have risen by about 2.2 percent a year, on average, during the past seven years, Bloomberg said, compared with 3.3 percent in the 20 years through 2008.

Ahead of the Fed’s announcement, the Consumer Price Index for November was flat on a seasonally adjusted basis, the Bureau of Labor Statistics said, although MarketWatch reported that some inflationary pressure appears to be rising.

Energy prices dropped 1.3 percent in November — gasoline prices fell again — and food costs slipped 0.1 percent to mark the first decline since March. Stripping out food and energy, so-called core prices rose 0.2 percent for the third straight month. The cost of shelter, health care, new cars and airline tickets climbed.

Consumer inflation clearly is no longer trending lower. From November 2014 to November of this year, it climbed 0.5 percent. That is still low, but it’s the largest annualized gain since December 2014.

“Inflation has been historically low since the Great Recession, but is now starting to pick up,” Stuart Hoffman, chief economist of PNC Financial Services, told MarketWatch.

This Christmas holiday-shortened week holds some important reports about the economy. Today economy watchers will see the report on third-quarter gross domestic product; the consensus prediction of economists is that GDP grew at a rate of 1.8 percent, down from 2.1 percent in the second quarter.

On Wednesday we will see reports for November on personal income (the forecast is for a gain of 0.2 percent, compared with 0.4 percent in October) and consumer spending (the forecast is for a gain of 0.4 percent, up from 0.1 percent in October).

The outlook for the November report on home resales, due today, is for a pace of 5.36 million at a seasonally adjusted annual rate, flat with October, and the forecast for the November report on new-home sales, set for release Wednesday, is for a rate of 503,000, up from 495,000 in October.

The University of Michigan’s Consumer Sentiment Index for December will be released Wednesday, although it likely comes too soon after the interest-rate increase to reveal the effects of the Fed’s decision on the public mood.

That development will await consumers’ reaction in the new year to higher borrowing costs that are on the way as the rate increase ripples through the economy.

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