US: Don’t expect headline inflation to bottom out until Q1 of next year – Deutsche Bank

Analysts at Deutsche Bank do not expect US headline inflation to bottom out in year-over-year terms until Q1 of next year, but they see year-over-year core inflation readings remaining near their recent levels through 2017 and into the early months of 2018.

Key Quotes

“This relatively stable near-term profile for core inflation is the result of several countervailing forces. On the upside, core goods inflation is expected to firm by one or two tenths in the coming months. From a macro perspective, this expectation is supported by a strengthening in leading indicators for core goods inflation. Indeed, our macro model – which accounts for past readings of the trade-weighted dollar, consumer PPI, ISM supplier deliveries index, and an alternative measure of used car price inflation – currently signals a stronger rebound in core goods inflation than we have factored into the forecast.”

“On the downside, core services inflation is expected to slow through year-end. For the CPI, we expect year-over-year core services inflation to slow by nearly one-tenth of a percent, driven importantly by a 30bp decline in the year-overyear inflation rate for shelter. Rent inflation is expected to fall by 20bp over the remainder of this year. This is a somewhat softer profile than would be implied by our rent inflation model (based on past values of home price inflation from Core Logic, the vacancy rate, the architectural billings index, and past trends in consumer spending), which would be consistent with a steadier trajectory for rent inflation. However, our forecasts see some modest further deceleration in CPI medical services inflation through yearend.”