Medical care inflation due for a rebound

Although the Fed expects to raise interest rates only very gradually next year, we suspect that an acceleration in core inflation, thanks in part to a rebound in medical care inflation, will force the Fed into a more aggressive tightening than the markets currently anticipate. The annual rate of core PCE medical inflation was a modest 0.6% in September, but it should climb back up to around 1.5% next year. This would add almost 0.4% points to annual core PCE inflation, putting it within touching distance of the Fed's 2% target.