Consumer prices were flat on a month-on-month basis in January, slightly softer than markets were expecting. Energy prices fell for the third consecutive month (-3.1% m/m), and are 4.8% lower than a year ago. Headline inflation now sits at a modest 1.6% on a year-on-year basis, down from 1.9% in December.
Core CPI prices (excluding food and energy) rose 0.2% in January for the fourth consecutive month. Similarly, core inflation remained at 2.2% (y/y), where it has sat for five of the past six months. However, there appears to be a bit more price pressures coming through on core inflation recently. On a three-month annualized basis, core prices are up 2.7%, up from a low of 1.6% back in October.
A key part of the recent heating up in core inflation has been core goods prices, which jumped up 0.4% in January. Core goods inflation has now been in positive territory for four months, the hottest it has been since 2011. Much of January’s jump up will likely reverse, as a 1.1% spike in apparel prices in January is likely to be at least partly reversed. Apparel prices have become quite volatile over the past year or so, but on net are up 0.1% year-on-year.
On the other hand, core services inflation was a bit more staid in January, rising 0.2% on the month. Core services inflation was up 2.8% versus a year ago, down from 2.9% the prior month, continuing a mild deceleration from a 3.1% peak back in the summer.
Key Implications
January’s inflation data had a little something for everyone. Continued strength in core goods prices provides reassurance that core inflation, which had softened somewhat through the middle of 2018, seems unlikely to weaken further. Meanwhile, steady to softening inflation for core services helps to alleviate concerns that we are about to see a break higher in inflation momentum. Core inflation is running right in line with our December forecast.
Inflation seems to be having a goldilocks moment – essentially right on the Fed’s target, with little indication it will shift in either direction soon. This should make the FOMC comfortable with its recent decision to be patient on monetary policy, and await clearer signs on how slower global growth and weaker confidence shows up in domestic data in the months ahead. We expect the U.S. economy to remain resilient, and that the next Fed hike is likely to come in the latter half of this year.
