We have so much news and headlines about Iran today and it does affect people's economic lives a lot. I know you can't make a forecast, but what's the best estimate that your people have been able to come up with now for what this is going to do to inflation and how quickly?
Well, I think it will directly go into headline inflation because energy prices are an important component of that. So I expect headline inflation to actually be elevated in the middle of this year. Of course, if energy prices come back down or stabilize, then that won't add more to inflation. So right now, my view on inflation is we're looking at an inflation rate for the year as a whole of something like two and three quarters percent. But of course, it depends what happens with energy prices.
What could we get to in the meantime? What's the sort of thinking about where inflation on a numerical basis could end up?
Well, again, it's hard to predict. But clearly, we can get into, you know, above 3% inflation, I think. You know, markets expectations right now are for CPI to be something like three, three and a quarter percent over the next year. So but it really depends on what happens both in terms of how high the energy prices get, but also how long they stay high or whether they come back down. Personally, I'm also very focused on what's happening with underlying inflation, core inflation, inflation expectations and other indicators as well, besides what's happening to energy prices underlying the broader picture.
Well, what's happening with core inflation?
Yeah, so there I think the story hasn't changed very much. Clearly, higher energy prices does add a little bit to core inflation. You think about airfares, which is part of core inflation, but is influenced by, you know, fuel prices. So I expect that to add maybe, you know, a tenth or two to core inflation over the year, the energy price component. But we've seen tariff rates come down. We've seen some other, I think, more positive signs on underlying inflation. So overall, I'm kind of where I've been for a while with core inflation around two and a half percent this year.
Well, how long? How high? How fast would inflation have to move to merit a rate response?
Well, I think really it does go back to kind of the full set of factors influencing inflation. And I'm going to bring up tariffs because it is a big part of the story so far about why core inflation has been elevated. So I am watching, you know, imported good prices, looking at core inflation, inflation expectations. And then obviously on top of that, what's happening to food, food and energy. So to my mind, monetary policy today is really well positioned given where all of those dynamics have been playing out and well positioned to kind of wait and see on some of the effects of, you know, what's happening today. This isn't I'm not saying we're just, you know, in some kind of we can't act. I think this monetary policy is exactly where it needs to be. And then we can we can respond if the situation changes. Right now, I think the monetary policy, though, is pretty well positioned. You know, given what we've been seeing so far, monetary policy is well-positioned.
But what about the economy? What's the state of the economy?
Well, you know, if you asked me this a month or two ago and we would be talking about the remarkable resilience of the economy growing at 2% last year, looking to grow even faster this year. Clearly, with the conflict in the Middle East, that changes out a bit. And so I'm you know, consumers, the families are going to be paying higher fuel costs, gas price with the gas price increases. So I've been bringing down my forecast for growth this year, probably somewhere between two and two and a half percent for growth this year. And unemployment rate probably staying around where it is now, 4.3%. And, you know, economy that's, you know, continuing to grow, but roughly, roughly at trend, again, driven by consumer spending and investments, especially in AI.
Well, you mentioned unemployment. You cut rates in the last year, we were told basically to prop up the labor market. What is the state of the labor market? Is that accomplished?
Well, it's hard it's hard to read all of the tea leaves because it's pretty complicated situation with the labor market. We are seeing some, you know, various kind of different signals. My if you look, my view is if you look at the unemployment rate, it's today 4.3%. It's about where it was in July. So we've seen some, you know, stability there in terms of the unemployment rate and in job openings and some of the other indicators. So I feel like we've got in the labor market, we've seen the labor market more much more stable now, definitely not a labor market that's weakening based on the economic indicators. That said, if you look at the surveys, including the survey that we do and the Conference Board survey, that's not how people are, you know, kind of feeling about the labor market. Definitely. We've seen a continued process of people being more pessimistic about the labor market, not about a recession or something, but just a view that this is a pretty low hire, low fire labor market. Maybe the kind of views are not as strong as you would, you would think, just looking at the aggregate payroll and unemployment data.
You're well-positioned to do whatever you need to do to help the economy. But can monetary policy really do a lot in these situations? What's the lag Jay Powell was talking about? It could be a year from now before it hits the economy, whatever you did.
Yeah, absolutely. So monetary policy, based on all of the kind of historical evidence, takes about a year to have its full effect on the economy and even longer on inflation. So we always have to be forward looking. We have to be thinking about where is the economy going to be rather than where it is today or where it's been in the past. So that means trying to, you know, think through where is inflation going to be, you know, later this year or next year? Where is the economy going to be? Now, I do you know, I go back to kind of the analysis we've done. I do expect underlying inflation eventually later this year to start coming back down because of the effects of the tariffs on inflation will start to wane. I do expect, you know, a continuation of the good, you know, positive movement in underlying inflation. But we'll have to watch. Is that does that continue? And again, what happens in terms of the conflict and its effects on inflation?
We're worried about the Iran war. We're worried about tariffs. People are worried about high. And you mentioned the consumer sentiment numbers, but the economy has been fairly resilient. Why?
