US inflation drifting below Fed's 2% goal; 2019 rate hike path less certain

Just when you thought US inflation was stabilising around the Federal Reserve's 2 per cent goal, it's getting pulled back down again.   

In contrast to the resounding success on their maximum-employment target, policy makers may have to wait a while before declaring victory on inflation as recent reports show price pressures are cooling off instead.

The slowdown -- covering the Fed's preferred price gauge, surveys of consumers and a poll of manufacturers -- is hard to ignore at a time central bank officials emphasise that their decisions will be increasingly data dependent. The path of 2019 interest-rate hikes looks less certain beyond a widely-expected move in December, which would be the fourth this year. 

Markets anticipate a slower tightening pace than the Fed has flagged. On Monday, a section of the US Treasury yield curve inverted for the first time in more than a decade, while five-year inflation expectations were near the lowest in more than a year. 

While the Labor Department's report on October consumer prices was mixed, the latest results for the Fed's own preferred price measure, which is tied to consumer spending, came in weak. Even though the so-called PCE gauge met the central bank's 2 percent goal, it failed to accelerate as economists had forecast, and has softened since mid-2018.

Excluding volatile food and energy costs, PCE inflation cooled to the slowest since February, bringing the three-month annualised rate to 1.1 per cent. The Fed monitors the core measure for a better read on underlying price trends, but it has topped 2 per cent just once this year on an unrounded basis.

Watching it is even more important at a time oil prices have plunged and show little sign of rebounding, a factor that weighed on a measure of prices paid for materials by manufacturers: that index fell by the most in six years in November, Institute for Supply Management data showed Monday.

"As always, our decisions on monetary policy will be designed to keep the economy on track in light of the changing outlook for jobs and inflation," Fed Chairman Jerome Powell said last week in New York.

Americans' views of inflation expectations for the next 12 months also weakened in November from the prior month, according to a University of Michigan survey. The gauge has been softening since matching a three-year high in August, though there's concern the tariff war with China may lead to higher costs for everyday items used by households. The anticipated inflation rate over the next five to 10 years rose.

While households benefit from contained inflation and will find comfort in lower fuel costs, the Fed tends to be wary of subdued longer-term price expectations taking hold. That's because if consumers believe inflation will stay low, it becomes hard for businesses to raise prices, and in turn, they shy away from raising wages, which then makes consumers even more resistant to accepting higher prices. 

Meanwhile, worker pay -- which tends to feed into inflation -- has also been moving up only gradually and is yet to show any major pickup even though the job market is tight and the unemployment rate is the lowest since 1969. That level is already well beyond what’s considered consistent with full employment, the Fed's other goal.