Fed likely to be disappointed with inflation again this year, UBS says

  • Inflation in the U.S. is forecast to end 2018 at around 1.7 percent — below the Fed's target of 2 percent, said UBS' chief U.S. economist Seth Carpenter
  • His view contrasted with a number of analysts who are projecting a quicker rise in inflation after the Trump administration approved sweeping tax cuts last December
  • Carpenter said wage inflation in the U.S. is not far from where it should, even though many are puzzled that incomes have not caught up with a stronger economy and tight labor market

The Federal Reserve's inflation target is expected to remain out of reach in 2018, leaving the central bank disappointed for yet another year, Swiss bank UBS said Tuesday.

Inflation in the U.S. is forecast to end the year at around 1.7 percent, below the Fed's target of 2 percent, the bank's chief U.S. economist Seth Carpenter told CNBC. Carpenter added that he expects the U.S. central bank to increase interest rates twice in 2018.

His view contrasted with a number of analysts who are projecting a quicker rise in inflation after the Trump administration approved sweeping tax cuts last December that include a drastic decline in corporate tax rate to 21 percent from 35 percent.

Many companies have since announced plans to increase capital spending and employees' pay — factors that should drive inflation higher.

But Carpenter said current wage inflation in the U.S. is not far from where it should be. Wages in the U.S. rose 2.5 percent in 2017 from the year before, according to the latest nonfarm payrolls data released last week.

"The first thing to keep in mind is that, in some long run equilibrium, wage inflation should be equal to what the growth rate of productivity is — so how much workers can produce — and the increase in prices for the goods they produce," he said at the UBS Greater China conference in Shanghai.

"Inflation is running currently at 1.4 percent or so, productivity growth is just a little below 1 percent, so we're actually not far out of that equilibrium for where wage inflation should be," he said.