Core inflation steady in 2016
Expect overall inflation of 2.3 percent by the end of 2016, after a mere 0.8 percent rise this year. Bringing inflation back to more normal levels: the end of declines in energy prices, including that of gasoline, next year. Recovery in those prices is likely to be small, perhaps only a dime a gallon for gasoline, but that will be enough to push total inflation above 2 percent.
The core inflation rate, which excludes food and energy prices, has picked up in the past few months. This rate will rise about 2.3 percent next year, after a 2.1 percent hike this year. The Federal Reserve considers the core rate a more reliable indicator of future inflation than the overall index, since food and energy prices tend to be heavily influenced by factors other than just the strength of the economy.
Look for food prices to grow by about 1.8 percent, slightly above the 1.5 percent pace in 2015. Food this year was affected by worldwide declines in commodity prices. The strong value of the dollar is also keeping down costs for imported food. The dollar and stiff price competition will keep prices of commodities and goods overall fairly flat in coming months. However, prices for services will rise nearly 3 percent next year.
The strong rental housing market will keep rents rising at a robust pace of 3 percent to 4 percent — strongest in the Northeast and urban areas of the West — while overall shelter costs will climb 3.4 percent. Medical care costs will be moderate at 3.0 percent, helped by a slower increase in prescription drug costs: from 4.5 percent in 2015 to 3.5 percent in 2016. But expect continued jumps in prices for hospital care and health insurance.
Meanwhile, day care costs will rise 4 percent as more parents find jobs and need someone to watch the kids. College tuition will rise about 3.5 percent — higher than inflation, as usual.