Consumer Prices Up, But Well Contained

Consumer prices increased by 0.2 percent in January, after posting no change in December. Meanwhile, core consumer prices posted the same increase as the overall measure.

Consumer Prices Well Contained

U.S. consumer prices remained contained out of the gate in January, as the consumer price index increased by 0.2 percent on the month. On a year-over-year basis, consumer prices stood at 2.9 percent, down from a 3.0 percent rate for the year ended in December. However, the index was contained due to the effects of seasonal factors, as energy services, which include electricity and gas services, dropped by 0.8 percent during the month due to the mild weather experienced in the United States in January. This effect is probably going to be phased out during the second month of the year, and we may see some recovery in those prices when the February number comes out.

The core consumer price index also increased by 0.2 percent in January, owing to a recovery in almost all sectors, with the exception of the above mentioned energy services and a strong 1.0 percent decrease in the price of used cars and trucks. Thus, it is clear that the warm winter has been, once again, behind the benign results in the consumer price index during the first month of the year.

The Increase in Consumer Prices was Broad Based

As we have argued before, while the increase in the consumer price index was benign, it seems that the only reason why this is the case was due to the mild winter weather affecting the U.S. economy during the first month of the year, something that will probably not be repeated in February.

What was noteworthy in this release was the fact that the increase in prices was broad based; that is, almost all sectors saw an increase in prices during the month. Gasoline prices increased by 0.9 percent, after dropping by 2.1 percent in December, while fuel oil prices increased by 1.4 percent. However, the increase in fuel oil prices is a bit of a mystery because fuel oil is also used, mostly, for heating homes and those prices should have dropped during the month, as we saw with the energy service sector. The reason for this may be due to the fact that fuel oil prices are not seasonally adjusted, which may be the reason why the increase in fuel oil prices was so strong during the month.

The biggest drop in prices in January, other than a 2.9 percent decrease in natural gas prices, was a 1.0 percent decrease in used cars and trucks prices. This was the fifth consecutive drop in this measure.

As we have said before, the overall picture for consumer prices remains benign and the Federal Reserve should be content to sit, wait and see what the future brings for the rate of inflation in the United States. If the economy and credit continues to improve, then the Federal Reserve will have to revise its stance in terms of interest rates. But until that happens, they will sit tight and enjoy the ride.