WASHINGTON – Economists are slashing U.S. inflation forecasts for 2015 as oil prices tumble. What's not changing are predictions that the Federal Reserve will raise its benchmark interest rate anyway, probably around midyear.
"We're still saying June with risks to September," said Michael Gapen, the New York-based chief U.S. economist for Barclays PLC. The Fed "can push rates higher in the middle of the year, even though visually that may look awkward if headline inflation is around zero."
A stronger dollar, slowing global growth and cheaper oil are holding down costs for goods such as televisions and autos. Fed policymakers will probably look past that and see an improving labor market that will force employers to offer higher wages. Those costs will soon push up the price of such things as rent and restaurant meals, no matter what happens overseas, giving the central bank room to raise interest rates that have been stuck near zero for six years.
The personal consumption expenditure, or PCE, price index that's the Fed's preferred measure will be up 0.5 percent in the second quarter of 2015 from the same time this year, Barclays economists projected on Dec. 19. That's down from a previous forecast of 1.2 percent. The consumer-price index, a separate gauge, is projected to show a small decline in the 12 months through June.
The Fed's goal is for PCE inflation to climb around 2 percent a year.