economics

U.S. Core Inflation Holds Steady as Energy Drags Down Main Index

U.S. Core Inflation Holds Steady as Energy Drags Down Main Index

  • Housing, medical care contribute to steady price increases
  • Energy, gasoline costs plunge by most in almost three years
Nela Richardson on Inflation and the Fed

A key measure of U.S. inflation was little changed in December while falling energy prices dragged down the broader gauge, giving the Federal Reserve little urgency to raise interest rates soon as it signals a more cautious approach in 2019.

Excluding food and energy, the so-called core consumer price index rose 2.2 percent from a year earlier for a second month and increased 0.2 percent from November, matching the median estimates of economists, according to a Labor Department report Friday. The broader CPI cooled to a 1.9 percent annual gain and was down 0.1 percent from the prior month as energy costs fell the most in almost three years.

Inflation in Focus

Headline U.S. consumer prices dipped in December, while core measure held steady

Source: Bureau of Labor Statistics

The data suggest inflation is contained around the Fed’s target, with prices underpinned by steadily rising wages and a tariff war with China. While the central bank last month penciled in two interest-rate hikes in 2019 following four in 2018, officials are now signaling a potential pause through March or longer amid headwinds from trade, the U.S. government’s partial shutdown and global growth risks.

Friday’s report showed shelter costs, which account for one- third of the CPI, rose 0.3 percent for a second month. That reflected 0.2 percent increases in both owners-equivalent rent - - one of the categories designed to track rental prices -- and rent of primary residence, while hotel and motel rates advanced the most since May.

Prices for medical care, which make up 8.6 percent of the CPI, rose 0.3 percent from the prior month.

Fed officials have taken a less hawkish tone since the December meeting, when they raised interest rates. In the past week, Chairman Jerome Powell and other officials have stressed that the central bank will be patient and flexible in responding to economic data, including the potential effects of the trade war.

On Thursday, Fed Vice Chairman Richard Clarida said in a speech that “inflation has surprised to the downside recently, and it is not yet clear that inflation has moved back” to the central bank’s goal on a sustainable basis.

What Our Economists Say...

While goods prices further declined amid the still-elevated dollar, the CPI featured nascent signs that rising wages have begun to filter into broader inflationary pressures. The recent acceleration in restaurant, lodging and recreation prices mirrors the pickup in compensation growth in retail and leisure and hospitality. This supports our view that wage inflation will materialize more meaningfully in the pace of core inflation this year.

-- Yelena Shulyatyeva, Tim Mahedy and Carl Riccadonna, Bloomberg Economics

Read more for the full reaction note. 

December figures for the Fed’s preferred gauge of inflation -- a separate measure related to consumption -- are scheduled for release on Jan. 31, though the report could be delayed because of the partial government shutdown. The Fed-preferred index and its core gauge tend to run slightly below the Labor Department’s CPI measures.

A separate report on Friday from the Labor Department indicates consumers are gaining more spending power from lower fuel costs. Average hourly earnings, adjusted for inflation, rose 1.1 percent in December from a year earlier, following a 0.8 percent gain in the prior month.

That could support consumer spending, which accounts for about 70 percent of the U.S. economy, at a time when the outlook is dimming for companies in a variety of industries. On Thursday, news from Macy’s and Kohl’s Corp. compounded concerns that rising interest rates and Chinese trade turmoil could dent consumption.

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  • Energy prices fell 3.5 percent from the previous month, the biggest drop since Feb. 2016, as gasoline prices plunged 7.5 percent.
  • Food costs rose 0.4 percent, the most since May 2014, amid the biggest increase in full-service restaurant prices since 2011.
  • The report showed used-car prices fell 0.2 percent, the first decline in three months and following two increases of more than 2 percent. New car prices were unchanged for a second month.
  • Apparel prices were unchanged in December during the crucial holiday-shopping season, reflecting a rise in women’s clothing costs and a decline in men’s wear.
  • The CPI is the broadest of three price gauges from the Labor Department because it includes all goods and services. About 60 percent of the index covers the prices that consumers pay for services ranging from medical visits to airline fares, movie tickets and rents.
  • Labor Department economic releases are proceeding as scheduled, as the agency isn’t part of the partial federal- government shutdown.

— With assistance by Jordan Yadoo, and Sophie Caronello