Forecaster of the Month: Inflation hasn’t disappeared, says top forecaster Meyer — it’s just hiding

The Federal Reserve will probably keep raising interest rates at a slow, steady pace in 2018 as inflationary pressures gradually mount, said Michelle Meyer, chief U.S. economist for Bank of America Merrill Lynch and the winner of the Forecaster of the Month award for October.

One of the biggest economic surprises in 2017 was the deceleration in inflation despite tightening labor markets, Meyer said in a phone interview. The Case of the Missing Inflation has confounded all the experts, including those at the Fed.

Also read: U.S. producer prices surge 0.4% in October

Meyer said a combination of cyclical and structural factors has been holding inflation lower than would be expected by the theory that prices rise when the economy is running at or close to its full capacity. Meyer pointed to such factors as globalization, low productivity, and lack of pricing power.

Meyer’s team at B. of A. Merrill Lynch expects the restoration of the textbook relationship between inflation and unemployment next year as the slack in the economy dissipates, giving workers and producers more pricing power. She figures that the NAIRU — the non-accelerating inflation rate of unemployment — is now around 4.5%.

“Despite how low the unemployment rate has fallen, inflation and wage pressures remain muted,” Meyer wrote in a recent research note. However, she does expect inflation to accelerate a little next year to 1.8% from 1.6% right now.

That’s not much movement toward the Fed’s 2% goal, but it should be enough for the Fed to raise rates three times in 2018, she said.

B. of A. Merrill Lynch doesn’t expect any major tax reform plan to pass Congress, but argues that the U.S. economy doesn’t need a tax cut at this time.

Meyer took over as the top U.S. economist for Merrill in August 2016, as Ethan Harris moved up to global economist. She has filled her U.S. team with rising stars: Joseph Song, Alexander Lin, Stephen Juneau and Anna Zhou. Meyer worked at Barclays Capital and Lehman Brothers before joining Merrill in 2010.

Competing against 46 forecasting teams in the October contest, Meyer and her team had the most accurate forecasts on three of the 11 indicators we tracked: gross domestic product, the ISM manufacturing index, and industrial production. On three others — the retail sales, consumer price index, and the consumer confidence index — their forecasts were among the 10 most accurate.
It’s the sixth time economists at Merrill have won our contest.

Meyer’s team’s forecast Number as reported*
ISM 60.0% 60.8%
Nonfarm payrolls 80,000 -33,000
Trade deficit -$43.0 billion -$42.4 billion
Retail sales 1.7% 1.6%
Industrial production 0.3% 0.3%
Consumer price index 0.6% 0.5%
Housing starts 1.190 million 1.127 million
Durable goods orders 0.8% 2.2%
Consumer confidence index 122.0 125.9
New home sales 560,000 667,000
GDP 3.0% 3.0%
*Subject to revision

The consensus forecasts MarketWatch publishes in our Economic Calendar are the median forecasts of the 15 forecasting teams that have done the best in our contest over the preceding 12 months, plus the forecast of the most recent winner of the Forecaster of the Month. Our enhanced consensus is much more accurate than the Bloomberg consensus that’s widely followed.

The economists in our consensus forecast: Jim O’Sullivan of High Frequency Economics, Ryan Sweet of Moody’s Analytics, Spencer Staples of EconAlpha, Sam Coffin at UBS, Gus Faucher at PNC Financial, Christophe Barraud at Market Securities, Paul Ashworth at Capital Economics, Brian Wesbury and Bob Stein at First Trust, Douglas Porter’s team at BMO Capital Markets, Michelle Girard’s team at NatWest Markets, Michael Feroli at J.P. Morgan Chase, Lou Crandall at Wrightson ICAP, Ian Shepherdson at Pantheon Macroeconomics, Pat O’Hare of Briefing.com, James Sweeney’s team at Credit Suisse, and Michelle Meyer’s team at Bank of America Merrill Lynch

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