INFLATION
With energy prices expected to level off or decline, overall inflation is set to fall in 2006 from its expected 3.8% rate in 2005. The more important pattern, however, will be core inflation. Forecasters expect core prices to be pushed up by the impact of higher energy costs that are passed through into prices broadly as well as a pickup in unit-labor costs. Federal Reserve policymakers will watch core inflation closely.
What the forecasters are saying:
Nariman Behravesh, Global Insight:
"We expect core inflation to edge higher, as firms do seem more able to pass on increased costs for energy and other materials than earlier in the cycle. That will motivate further Fed hikes to at least 4.75%. But a slowing economy and intense competition should keep a lid on inflation."
Ethan Harris, Lehman Brothers:
"We expect a low pass-through to general inflation. The economy still has some slack capacity, and the global competitive threat should limit the wage and price pickup."
Ed McKelvey, Goldman Sachs:
"Core inflation is currently in the upper bounds of the Fed's comfort zone -- thus, we expect the Fed to continue tightening through mid-2006. Pricing power has improved over the last two or three years, but it is still fairly limited."