By Sarah Very
While easing energy costs kept consumer prices in check last month, inflation rates for goods other than food and energy moved higher in January – raising questions as to how the Federal Reserve will respond.
The Bureau of Labor statistics said Friday that the Consumer Price Index remained unchanged in January on a seasonally adjusted basis, up from the 0.1 percent drop analysts surveyed by Bloomberg were expecting.
“Core inflation,” however, which excludes the often volatile food and energy categories, rose a surprising 0.3 percent in January – the largest gain since March 2006, and above Bloomberg analysts’ expectations of 0.2 percent. The increase comes after a 0.2 increase in December 2015, as well as a December decision by the Fed to raise short-term interest rates.
The hike in core CPI was largely due to an increase in medical care and shelter prices, which swelled by 0.5 percent and 0.3 percent, respectively. Apparel was also on the rise, up 0.6 percent despite recent downturns.
Working to offset January’s price upturns was a diminishing energy index, where the reading was dragged down by the falling cost of oil. Energy prices fell 2.8 percent for the month, balancing the upturn in core CPI yet still lessening the overall inflation decline. Gasoline prices eased by 4.8 percent in January, to its lowest level since March 2009. That move marks a slowdown in the rate of decline: the energy index dropped 6.5 percent over the past year, the measure’s smallest 12-month decline since November 2014.
The nation’s overall inflation rate rose 1.4 percent over the last twelve months, compared to the 0.7 twelve-month increase for the period ending in December.
Core prices rose 2.2 percent over the last 12 months, and that reading has been steadily moving north of the 2.0 percent rate that the Federal Reserve considers its 2.0 target.
According to a report by J.P Morgan economist Michael Feroli, “the acceleration of core CPI to over 2 percent even at a time when, over the previous 18 months, the dollar is up 20 percent and crude oil prices are down 70 percent,” affirms domestic cost pressures.
The increase in core CPI, which includes the price of rent, medical care and apparel, raises questions among economists about whether or not they Federal Open Market Committee will decide to raise interest rates during its March meeting.
Comerica Bank Chief Economist Robert A. Dye wrote in a report that price indexes provided the the most significant deviation from macroeconomic expectations. He referred to the uptick of core CPI as the “underlying current of inflation” that “will catch the Fed’s attention when the Federal Open Market Committee convenes over March 15 and 16 to discuss monetary policy.”
Dye added, “We still believe that a rate increase in March has a very low probability, but hotter price indexes raise the odds of rate hikes later this year.”
Dye also said that according to the fed funds futures market, the likelihood of a March 16 rate increase is 8.3 percent, increasing to 14.3 percent in April and 24.7 percent in June.
On the other hand, BMO Capital Markets senior economist Jennifer Lee reported that this month’s results warranted the December rate hike and “keep the Fed at the rate hike table.” She suggests looking to core PCE, or personal consumption expenditures prices excluding food and energy, because “the Fed watches core PCE, and medical care costs make up a bigger share (about 30 percent) of PCE than CPI.”