US inflation, looking ahead - Nomura

Analysts at Nomura explained that Chair Yellen noted in September, “my colleagues and I currently think that this year's low inflation is probably temporary, so we continue to anticipate that inflation is likely to stabilize around 2 percent over the next few years.” 

Key Quotes:

"This suggests that the near-term path of the federal funds rate is less sensitive to “temporary” fluctuations in inflation. Another series of weak inflation data is likely necessary for policymakers to change the course on the policy rate. In other words, “data-dependency” now hinges more on the medium-term inflation outlook, as opposed to the short-term one.

 
The underperformance of inflation this year is significant, but not unprecedented. Historically, however, such underperformance of inflation has been short-lived. In this context, there will likely be a limit to the FOMC’s patience, but the FOMC’s willingness to continue to tighten US monetary policy in spite of weak inflation this year may be understandable. We agree with the FOMC’s view that inflation will likely return to a higher trend next year. However, if inflation does not pick up relatively quickly, the FOMC may slow the pace of interest rate hikes next year."