(Reuters) - The steady drop in the U.S. unemployment rate has set up a simple set of arithmetic that will lead to a Federal Reserve interest rate rise soon to ward off future inflation, according to the most accurate forecaster in Reuters polls last year.
Jim O'Sullivan, chief U.S. economist at High Frequency Economics, isn't yet completely convinced that Janet Yellen's Fed will begin raising rates in June. But he says it's only a matter of time before they will have to.
"The idea that the economy is so fragile that it can't take a rate hike? I don't think so," he said.
He doesn't believe that the U.S. being a lone engine of growth, while many parts of the world economy remain at risk to a renewed downturn, will prevent the Fed from focusing on its mandate of full employment and low inflation.
What concerns O'Sullivan in terms of judging the timing of the first U.S. rate hike in a decade is that even the core measure of inflation the Fed watches has remained surprisingly low at a time when the job market has taken off so strongly.
"If wages are slowing and core PCE is slowing, they don't go," he said, noting that even core PCE inflation slipped to 1.3 percent in December from 1.5 percent last summer around the time oil prices began their spectacular tumble.
But the powerful surge in hiring across the United States, evidenced in the latest employment numbers that took place over the same period, is necessarily going to bring an already-low jobless rate of 5.7 percent even lower.
"The arithmetic is just overwhelming. Unless employment growth slows dramatically, the unemployment rate is going to continue to fall," O'Sullivan said.
Federal Reserve Chair Janet Yellen noted the "considerable progress" in the labor market recovery in testimony this week but said "room for further improvement remains."
"The part we can be most confident in is that the trend in the unemployment rate is going to remain downwards," he said. "In turn, that means eventual upward pressure on wages and inflation. The Fed needs to be forward looking."
HFE's O'Sullivan topped a list of more than 80 forecasters graded by StarMine for accuracy on a set of key monthly data releases in 2014, including GDP, inflation, retail sales, jobs, as well as purchasing managers' surveys of business activity.