United States: Inflation continues to fall in January on further energy price decline
Consumer prices were flat month-on-month at the outset of the year, matching the revised December reading (previously reported: -0.1% month-on-month) but slightly undershooting analysts’ estimates of a 0.1% rise. Energy prices continued to tumble for the third month in a row, falling 3.1% mom in January after logging similar declines in November and December, thus weighing on the headline print. Due to cheaper energy, transportation prices also fell in the month, while conversely the price of food, shelter and medical care services registered solid increases. Consequently, core consumer prices—which exclude volatile items such as food and energy—rose 0.2% month-on-month in January, also stable from December.
Inflation meanwhile dived from a revised 2.0% in December (previously reported: 1.9%) to just 1.6% in the first month of 2019. Again, nosediving energy prices were largely responsible for the dip, with the energy index falling 4.8% year-on-year while the price of energy commodities such as gasoline tumbling even more sharply, declining nearly 10% on an annual basis in January. Core inflation—a closely watched indicator for forecasting future monetary policy moves—was nevertheless stable at December’s 2.2% in January, thanks to robust gains in the price of services. The January print continued to be consistent with the Federal Reserve’s goal to keep core PCE inflation, its preferred price gauge, close to 2.0%.
Looking at the inflation outlook, James Knightley, chief international economist at ING, believes “the US is at, or at least very close to, the bottom for headline inflation. For one thing, we suspect energy will start to make more of an upside contribution in March and April given the price of oil has risen $12/barrel since its mid-December trough. More significantly, there is a shrinking amount of spare capacity in the economy and this is now clearly feeding through into higher worker pay. […] These higher wages are adding to business costs and we expect to see more firms passing them onto consumers”.
However, what this means for future monetary policy moves from the Fed—which has signaled a significant halt, if not a definitive stop, in its policy tightening at its January meeting—is for now still uncertain. Though stellar job growth is pushing up wages, and thus core price pressures, the Fed recently appeared to be concerned about downside risks to growth, stemming both from a domestic slowdown and from international factors such as the trade war with China. The latter risk appears of particular significance, as according to James Knightley future rate hikes will crucially depend on “positive news from the US-China trade talks and a general de-escalation of the protectionist threat”. Though many analysts interpreted the Fed’s concern as indicating no further rate hikes until the second half of 2019, the ING economist still believes that if progress on trade talks “can be achieved then […] we will see a June rate hike. If not then the risks to growth will be heightened and it may be that the Fed funds rate has already peaked”.