• Consumer prices rose only 0.1% on the month in January, one tick lower than market expectations, and a deceleration from the 0.2% increase in December. Still, inflation ticked up to 2.5% on a year-on-year (y/y) basis, up from 2.3% in December.
  • The energy index fell 0.7% (m/m) in January, driven lower by a 1.6% drop in gasoline prices. Despite January’s decline, energy prices have been a key inflationary force over the past year with prices up 6.2% versus a year ago.
  • Food inflation continues to be subdued. The food index increased 0.2% in January, and on a y/y basis was up 1.7%.
  • Core prices rose 0.2% (m/m), a tick up from December’s soft 0.1% increase, and in line with market expectations. The core inflation rate versus a year ago remained steady at 2.3% in January.
  • Prices also rose for shelter (+0.4% m/m), medical care (+0.2% m/m), apparel (+0.7% m/m), recreation (+0.3% m/m), education (+0.3% m/m) and airline fares (+0.7% m/m).
  • Core services price pressures heated up a bit in January, rising 0.3% m/m. That took the year/year pace to 3.1%, the highest it has been since mid-2018. Medical care services have been a key part of that acceleration. Year/Year inflation there has risen from 2.4% in January 2019 to 5.1% in January 2020, driven by rising hospital services costs and a dramatic upswing in the cost of health insurance.
  • In contrast, core goods prices were flat, and are down 0.3% versus a year ago. Inflation across the majority of core goods is basically non-existent. The one main area where price pressures have picked up on a year/year basis is medical care commodities, but even there prices fell 0.6% on the month.

Key Implications

  • There are some interesting trends beneath the surface on inflation, but from a high level January’s data indicated that overall inflation pressures remain well contained. Core CPI inflation of just above 2% implies core PCE inflation of roughly 2%, pretty close to the Fed’s desired level. The uptick in core inflation pressures is more reassuring that inflation pressures aren’t cooling further, than a warning of an imminent break out in price pressures.
  • This should give the Fed reassurance as they wait and assess the impact of past rate cuts and the risks to global economic growth from the novel coronavirus outbreak in China.


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