On February 14, the US Consumer Price Index (CPI) report for January came out mostly as expected, with prices up 0.5% month-over-month or 6.4% on a yearly basis. This was largely due to an increase in energy costs (+8.7% year-over-year) and food prices (+10.1% year-over-year).
Core CPI, which excludes food and energy prices, was up 0.4% month-over-month. This was a 5.6% increase on an annual basis, down from September’s high of 6.6%. The shelter component was up nearly 8% year-over-year and accounted for nearly 60% of the total increase in core inflation. The Trimmed Mean CPI, which excludes CPI components with the most extreme monthly price changes, increased at 7% (annualized rate). This suggests that inflation is still broadly too high.
Looking at just core service inflation, excluding housing and energy services, this index was up 0.24% month-over-month, and the yearly rate eased to 6.1% from 6.4%. The 3-month annualized rate for this measure was 3.7%, which is down dramatically from the peak of 9.1% reach last June.
While the trend for inflation may have turned, the US still has an inflation problem. The economy and labour market are still operating above capacity. For inflation to consistently be at the 2% target rate, the economy will need to move from a state of excess demand to a state of shortfall.
US inflation is slowly heading lower, but core price inflation remains elevated. This, combined with strong January payroll data, will keep the US Federal Reserve biased towards raising rates. This has relevance here at home, since changes in the federal funds rate affect long-term interest rates in both the US and Canada. The dilemma for the Fed is how tight a stance to take with monetary policy – and for how long – to achieve the desired rebalancing of the economy.
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