U.S. Inflation May Be Less Than Meets the Eye, These Gauges Show

(Bloomberg) -- Steady U.S. price gains in January masked shifts below the surface that Federal Reserve officials may ultimately find unfavorable in their quest to bring inflation back up to their 2 percent target.

So-called procyclical inflation -- a measure containing the prices of goods and services that typically rise faster when employment is increasing -- decelerated last month to the lowest level on an annual basis since April 2014, according to data compiled by Bloomberg News from Commerce Department figures published Thursday.

A bounce in acyclical inflation -- the prices of goods and services that don’t appear to correlate with labor-market conditions -- left the Fed’s preferred gauge little changed overall.

The split between procyclical and acyclical prices was highlighted in recent San Francisco Fed research, and adds to the inflation conundrum U.S. central bankers have on their hands. Policy makers have largely dismissed an unexpected retreat in price pressures that began in early 2017 as a function of one-off price declines -- especially for that of wireless-phone services -- and expect a strong job market to help lift inflation back to 2 percent.

The underlying data tell a more nuanced story. The so-called core inflation rate they watch closely, which strips out volatile food and energy prices, was just 1.5 percent in January, and the cell-phone pricing change that hit the index in March 2017 is only holding it down by about a tenth of a percentage point.

U.S. Inflation May Be Less Than Meets the Eye, These Gauges Show

The slowdown in procyclical inflation in January stemmed from several components, including food services and accommodations, recreation services, prescription drugs and nonprofit spending. Rental inflation, one of the biggest drivers of core and procyclical inflation, was little changed.

Investors peg the probability of a rate hike when Fed officials meet March 20-21 above 90 percent, according to fed funds futures. And some of those officials, including new Chairman Jerome Powell, have hinted at the possibility this week that policy makers may change their projections for rate hikes this year to four instead of three, on account of increased confidence that tax cuts and government spending increases will boost economic growth, drive down the unemployment rate further and boost inflation in the process.

For now, as over the past several years, the inflation part of the story remains still just a forecast.

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