- The year-over-year rate of CPI inflation rose to 2.5% in January from 2.1% in December as energy prices continued to recover from last year’s lows. Core inflation (ex food and energy) edged up to 2.3%, matching post-recession highs and defying expectations for a dip to 2.1%.
Headline CPI rose 0.6% on a month-over-month basis, the strongest increase in four years. Energy prices played a big role, rising 4% in January as gasoline prices increased at nearly twice that pace. Food prices edged up by 0.1%, the first increase since April 2016. A stronger-than-expected 0.3% monthly increase in core CPI was also a factor. Core commodities picked up strongly, led by the apparel component, and non-energy services prices also increased at a solid pace driven in part by the transportation sector.
Our Take:
Headline inflation has now risen for six consecutive months as energy prices switched from a source of disinflation to a positive add. We expect that trend will continue in February with inflation picking up closer to 2¾%. The Fed is likely to view this increase as transitory, although their tolerance of higher inflation would likely be limited if fiscal stimulus looks set to push the economy into excess demand. Even without a fiscal boost, today’s report provides some evidence of firming price pressure – core inflation surprised to the upside and services inflation ex shelter (likely a better indicator of domestically-generated prices pressure) also increased. This supports Chair Yellen’s comment yesterday that it would be "unwise" to wait too long before raising rates further. There is a clear bias to hike again before mid-year, although given lingering uncertainty regarding US fiscal and trade policy, we think the balance of risks favours waiting until Q2 rather than raising the fed funds rate at the coming meeting in March.
