The headline consumer price index (CPI) jumped 0.5% in January. That left inflation on a year-on-year basis at 2.1%, steady versus December.
Higher energy prices contributed to the pop in the headline (+3.0% m/m). An increase in the gasoline index (+5.7%) offset declines in other energy components. Food prices rose 0.2% on the month.
Core inflation posted a hearty 0.3% monthly gain. Along with shelter (+0.2%), apparel (+1.7%), and medical care (+0.4%), the indexes for motor vehicle insurance (+1.3%), personal care (+0.5%), and used cars and trucks (+0.4%) also rose in January. The indexes for airline fares and new vehicles were among those that declined over the month.
Despite the hearty monthly gain, unfavorable base effects kept the year-on-year pace of core inflation at 1.8%, unchanged from December. Core inflation has hovered in the 1.7-1.8% range for nine consecutive months now.
Key Implications
Today’s report should give more confidence that inflation pressures are perking up in the U.S. economy. Core inflation may be below 2% for now, but that in part is due to comparisons to hot inflation readings at the beginning of 2017. Even modest increases in core inflation over the next couple of months will see it rise above two percent.
While there were some sizeable jump ups in categories like apparel, which are unlikely to be repeated in February, more persistent categories of services inflation are starting to show upward momentum. That gives us greater confidence that inflation pressures are likely to be sustained.
Inflation has been the missing piece in the puzzle for rate hikes over the past several months, which had led some members of the FOMC to dissent on rate hike decisions over the past year. Today’s report increases our confidence that the Fed will raise rates in March.
