The first wave of price declines is over but the second is yet to come.
The Fed wants to look through lower headline inflation prices but it won't be able to look through the effects of the stronger dollar and the second-round effects of commodity prices. Those effects will prevent the Fed from ignoring low inflation numbers and will instead keep policymakers in a wait-and-see mode, likely stretching out the horizon for the first rate hike.
A few points from Goldman Sachs economists on inflation:
- "Auto import prices have begun to fall over the last few months, and we expect a decline in consumer prices to follow.
- "Our equity analysts expect apparel prices to fall for the remainder of 2015, and the 12% drop in raw cotton prices in the March PPI suggests further declines could come soon"
- "Health care inflation should normalize from the current sub-1% rate eventually, soft wage growth in the health care industry suggests little immediate upward pressure."
- "Data from REIS indicate that new construction should raise the vacancy rate."
"[W]hile the first stage of oil price pass-through appears largely complete, import prices likely have further to fall. ...
Overall, we expect that further pass-through will cause year-on-year core PCE inflation to fall by another 0.1-0.2 percentage points by the September FOMC meeting." - "It appears that Fed officials increasingly view pass-through disinflation as something to be waited out, rather than as something to be ignored"
If corporate profit numbers continue to show lower volumes -- like DuPont today -- then US companies may also need to cut prices to maintain market share.