Highlights:
- The all items CPI remained unchanged in January which represented the third consecutive month of steady prices. The level of the CPI over all three months was restrained by gasoline prices steadily declining 5% to 6% in each of the three months.
- Food prices rose a trend like 0.2% in January following a 0.3% gain in December. Core prices, which eliminates the impact of both food and energy prices, rose 0.2% for the fifth consecutive month.
- The overall CPI year-over-year rate dropped to 1.6% from December’s 1.9% while the annual increase in core prices held steady at 2.2%.
Our Take:
January consumer prices held steady matching unchanged prices in December. Both months saw downward pressure from falling gasoline prices with this component in January dropping 5.5% after December’s decline of 5.8%. Food prices and core prices, which eliminate the impact of energy and food prices, both rose 0.2% in the month. The decline in gasoline prices is in contrast to a sizeable monthly increase a year ago resulting in the overall CPI year-over-year rate dropping to 1.6% from 1.9% in December. The annual increase in core prices held steady at December’s rate of 2.2%. The annual increase in core prices holding steady tempers somewhat concern about the economy operating beyond capacity. Such provides further reason for the Fed to opt for ‘patience’ in the setting of near-term monetary policy. However, the increase is still slightly above the Fed’s inflation objective of 2.0%. As well, the upward drift in wage inflation remains intact with the most recent increase in January at 3.2% implying an ongoing inflation risk going forward. Our forecast assumes that GDP growth will remain sufficiently strong to keep the U.S. economy in excess demand and put greater upward pressure on core inflation going forward. This is expected to result in the Fed eventually raising fed funds a further 50 basis points sending the upper end of the fed funds range to 3.0% by the end of 2019.
