Core inflation is beginning to show signs of firming. The rebound in the annual core CPI inflation rate to 1.8% in March may not be enough to leave Fed officials "reasonably confident" that inflation will move back to the 2% target over the medium term. Nevertheless, over a shorter time horizon, the jump in the three-month annualised core CPI rate illustrates that the weakness in the second half of 2014 was temporary, presumably driven by the indirect effects of the slump in energy prices. With domestic price and cost pressures mounting and the dampening effect of the stronger dollar likely to fade in the second half of this year, we expect core inflation to climb above the 2% target next year.
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