by Calculated Risk on 11/11/2015 10:58:00 AM

From Bloomberg: Goldman Sachs: Health-Care Costs Are About to Start Pushing Core Inflation Higher

"Assuming that the policy-related influences roll off as we expect and that the underlying rate of health inflation rises by the same rate as our predicted path (i.e., it starts from the lower than predicted level but rises by the same amount), we expect that the PCE price index for health services should return to around 1.5 percent year-on-year growth by [the second quarter of] 2016 under the base case, raising core PCE inflation by about 0.15 percentage points," [Goldman Sachs economist Alec Phillips] wrote. "If our estimated equation is accurate and prices begin to catch up with rising wages in the sector, health inflation could potentially rise by a bit more."

As of September, the core PCE index has risen 1.3 percent year-over-year, well shy of the Fed's 2-percent target. A major challenge for the U.S. central bank, which has strongly hinted at liftoff for interest rates in December, will be proving that core PCE inflation can rise along with policy rate.

According to Goldman's analysis, this key segment looks likely to cooperate in this regard, helping the central bank move closer to meeting its dual mandate.

PCE measured inflation is typically lower than the Consumer Price index (CPI). There are several reasons for the difference in measurement, but a key reason recently is CPI puts more emphasis on rents and housing, and PCE puts more on health care.   Since rents and housing have been increasing quicker than healthcare, this has increased the gap between core CPI and core PCE.

Core PCE was at 1.3% year-over-year in August, and core CPI was at 1.9% in September - and the Goldman analysis suggests core PCE should move up in coming months.