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US: Prices at the Pump Lifted Headline Inflation in December, While Core Inflation Remained Subdued

  • Consumer prices rose 0.4% month/month in December, right on expectations. Total CPI was up 1.4% year-on-year in December, up slightly from November.
  • Headline inflation was lifted by an 8.4% month/month increase in gasoline prices. Food prices also rose 0.4% on the month, and are up 3.9% versus a year ago.
  • Core inflation was more benign, rising 0.1% m/m in December. As a result, core inflation was steady at 1.6% year-on-year for the third consecutive month.
  • Price pressures for core goods picked up a bit in December (+0.2% m/m). This was driven by a sharp increase in apparel prices (+1.4% m/m). Prices for new vehicles were also higher (+0.4% m/m). Core goods prices are now 1.7% higher than a year ago, while core services are up 1.6%. Over the past fifty years of inflation data, service price inflation has rarely underperformed goods. When it does occur, it is typically after a recession has taken the steam out of services price pressures.
  • Within core services, prices for transportation services (-0.1% m/m) and medical care services (-0.1% m/m) kept service price pressures benign (+0.1% m/m). The heavily-weighted shelter index rose a modest 0.1% m/m for the fifth month in a row, and is up only 1.8% year/year in December. Shelter inflation was 3.3% prior to the pandemic.
  • In-person data collection continued to be suspended by the Bureau of Labor Statistics in October. Response rates remain lower than they were a year ago, but improved slightly from November.

Key Implications

  • The Covid-19 pandemic significantly reduced inflation pressures in 2020. Various categories have been held back by low demand and restrictions imposed by the pandemic – airline fares, apparel, lodging away from home and motor vehicle insurance. As the vaccine is rolled out and people return to pre-pandemic patterns, these areas are likely to see firmer price pressures.
  • More fiscal stimulus started rolling out in January, and there is an increased likelihood that the Biden Administration will deliver further assistance. This raises the risk that price pressures will pick up more than we expected in our December forecast. However, this is weighed against the downside risks from a continued rise in infections, and virus mutations that could see the pandemic drag on. We will be watching announcements from the incoming administration closely for hints on fiscal policy and the speed of vaccine rollout.
TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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