The Fed’s focus on inflation progress suggests a greater focus on both headline and underlying inflation showing signs of rising back to target, notes RBS.
“Actual progress on inflation would likely also include a sense of confidence that both the stronger USD and falling energy prices, which are both judged as transitory and have weighted on both total and core inflation to different degrees, prove to actually be transitory,” RBS adds.
“Given our sense that actual inflation gains have taken on more importance for the Fed outlook, we would expect the market to put an even greater focus on the Fed’s preferred inflation measure, the headline and core PCE deflator, released in the PCE report on December 23rd , which includes updates on personal income and spending growth.
Our economists see the core PCE deflator as holding unchanged in November at 1.3% y/y, matching the Fed’s central tendency forecast announced for 2015 on Wednesday. The Fed’s own forecast for the core PCE deflator is for it to rise to just 1.7% by end-2016,” RBS projects.