US Economics

Consumer Prices (Dec.)

US Data Response
Written by Michael Pearce

The more muted 0.1% rise in core consumer prices in December suggests that the trend in underlying inflation is still close to 2%. With wage growth also moderating in recent months, there will be little pressure on the Fed to raise interest rates as economic growth gradually accelerates later this year.

Stable inflation to keep the Fed on prolonged hold

  • The more muted 0.1% rise in core consumer prices in December suggests that the trend in underlying inflation is still close to 2%. With wage growth also moderating in recent months, there will be little pressure on the Fed to raise interest rates as economic growth gradually accelerates later this year.
  • Headline consumer prices rose by 0.2% m/m last month, as an increase in gasoline prices pushed energy prices up by 1.4% m/m. With energy prices falling sharply this time last year, that was enough to push headline CPI inflation up to a 15-month high of 2.3%. Those base effects should push inflation a little higher in January too, before it drops back over the course of 2020.
  • Excluding food and energy, the core CPI index posted a smaller 0.1% m/m rise. Core goods prices were unchanged, held down by a 0.8% m/m drop in used vehicle prices, which the wholesale auction data suggest will fall further in the months ahead. There are still few signs that tariffs pushed up consumer prices, with furniture prices implying that this week’s deal to roll back some tariffs will have no impact on inflation.
  • More relevant for the Fed, core services prices increased by a subdued 0.2% m/m, reflecting more moderate shelter inflation, although that was in part due to a 1.8% drop in hotel prices which will not be sustained. Airfares also fell by an outsized 1.5% m/m, unwinding some of the surge seen earlier in 2019.
  • CPI medical care inflation remains elevated, with prices rising by 0.6%, reflecting a 1.3% m/m jump in drug prices and another big rise in health insurance prices, which are still rising by 20% y/y. The former will show up in the Fed’s preferred PCE measure of core inflation, but the latter won’t, since the source data and coverage for the PCE measure differ.
  • Overall, core CPI inflation remained at 2.3%, but the 3-month annualised rate has fallen back to 2.0% now from above 3% a few months ago. (See Chart 1.) With inflation showing few signs of rising decisively beyond the Fed’s 2% target, we expect the Fed to remain on hold for several years.

Chart 1: Core CPI

Source: Refinitiv

Table: Consumer Prices

All Items

Excl Energy & Food

Energy

Food

Core Goods

Core Services

%m/m

%y/y

%m/m

%y/y

%m/m

%m/m

%m/m

%m/m

Oct

0.4

1.8

0.2

2.3

2.7

0.2

-0.1

0.3

Nov

0.3

2.1

0.2

2.3

0.8

0.1

0.0

0.3

Dec

0.2

2.3

0.1

2.3

1.4

0.2

0.0

0.2

Source: BLS


Michael Pearce, Senior US Economist, +1 646 583 3163, michael.pearce@capitaleconomics.com