Blue Chip forecasters raise US inflation outlook

Top US forecasters bumped up their forecast for inflation this year and said economic growth is poised to slow abruptly in the coming months as consumer spending slows, a survey showed on Saturday.
Panelists surveyed in the Blue Chip Economic Indicators newsletter said surging energy prices, a weakening housing market and lower consumer confidence will dampen growth in the current and coming quarters.
Despite the slowdown, 63 percent of panelists said simmering inflation concerns will prompt the Federal Reserve to raise interest rates again at its June 28-29th meeting. But inflation worries are not expected to last.
"Critical to the outlook that the pace of economic growth will merely moderate is the consensus assumption that inflation is set to slow appreciably," the newsletter said.
Panelists did not alter forecasts made a month ago for solid 3.4 percent gross domestic product growth in 2006, but trimmed their outlook for 2007 growth to 2.9 percent from 3.0 percent forecast in May.
The survey of 54 professional forecasters, taken June 5 to June 6, showed GDP growth is expected to slow from the first-quarter's sizzling 5.3 percent annual pace to just 2.9 percent in the second and third quarters and 2.8 percent in the final three months of the year.
The analysts forecast a 3.3 percent increase in the Consumer Price Index, up from 3.1 percent forecast in May. It was the second straight increase in inflation expectations.
"However, annualised growth in the CPI in Q3 and Q4 of this year will fall to about 2.5 percent," the consensus said, adding that the CPI increase would also be a moderate 2.5 percent in 2007.
"If instead inflationary expectations continue to increase, the Federal Reserve will be forced to raise interest rates by more than expected," the newsletter said.
Weakening consumer demand will be a leading damper on growth, it said, noting that consumer spending has declined in response to sluggish growth in personal income and a slowdown in hiring.
There are some bright spots in the forecast, with non-residential business investment, inventories and net exports all seen boosting growth this year. The panel put the odds of a US recession in 2007 at about 21 percent.