Core inflation on the rise

The acceleration in core inflation suggests that the threat of deflation has eased significantly, at least for a while, which is one of the key reasons why we don't expect the Fed to respond to the recent signs of weaker economic growth with QE3. To some extent the rise in core inflation reflects the indirect impact of higher commodity prices and the impact of supply disruptions on vehicle prices. As those effects are reversed, core inflation should drop back a little in the second half of the year. More generally, with the unemployment rate expected to remain elevated for several more years, our forecast is still that core inflation will remain well below the Fed's implicit 2% target rate.