A woman checks a mobile phone while shopping at a Kroger Co. grocery store in Birmingham, Michigan, U.S. (Photographer: Sean Proctor/Bloomberg)

U.S. Inflation Remains Contained Amid Fed Patience on Rates

(Bloomberg) -- A key measure of U.S. inflation was little changed in January while the broader gauge slowed on lower energy costs, underscoring the Federal Reserve’s recent decision to be patient on raising interest rates.

Excluding food and energy, the so-called core consumer price index rose 0.2 percent from the prior month and 2.2 percent from a year earlier, Labor Department data showed Wednesday. The monthly pace matched the median estimate of economists. The broader CPI was unchanged from December, below forecasts, while the 1.6 percent annual gain was the smallest since June 2017.

U.S. Inflation Remains Contained Amid Fed Patience on Rates

The data suggest inflation remains around the Fed’s 2 percent target, with prices getting a lift from steady wage gains. Fed officials have signaled a pause on raising rates amid global growth risks and headwinds from trade.

Even so, Treasury yields and the dollar rose after the report amid some hints that core inflation could be picking up. The latest data brought the three-month annualized increase to 2.65 percent, the fastest since March. If such acceleration is sustained, the Fed could have more reason to reconsider its rate pause.

Analysts said the data show inflation pressures are steady -- with potential to pick up -- though remain relatively muted. Bank of America Corp. economist Joseph Song said the report “doesn’t really change our outlook” for core inflation of 2.1 percent this year. Jim O’Sullivan of High Frequency Economics wrote that the “trend in core remains tame, but it is still up slightly in the past year.”

A separate Labor Department report on Wednesday illustrated how consumers are getting more purchasing power from falling energy prices: average hourly wages, adjusted for inflation, increased 1.7 percent in January from a year earlier, the biggest increase since mid-2016, reflecting the slowdown in the main inflation gauge.

What Our Economists Say...

Analysts should not be overly sanguine toward the soft headline print, which was largely attributable to sagging gasoline prices. Instead, they should be cognizant of a nascent acceleration bias in the core. Bloomberg Economics projects this bias will drive inflation higher over the course of 2019. Ultimately, this will put Fed hikes back on the table, possibly as early as the third quarter.-- Carl Riccadonna, Yelena Shulyatyeva and Tim Mahedy, Bloomberg EconomicsRead more for the full reaction note.

Since raising rates in December for a fourth and final time in 2018, Chairman Jerome Powell and his colleagues at the central bank have pledged to be patient in deliberating another increase.

Powell signaled at his last press conference in late January that borrowing costs are unlikely to rise until inflation accelerates. “I would want to see a need for further rate increases, and for me, a big part of that would be inflation,” he said. “It wouldn’t be the only thing, but it would certainly be important.”

While policy makers projected two 2019 rate hikes at their December meeting, investors expect no moves for the whole year, according to pricing in rate futures. Economists see one interest-rate increase this year, cutting their estimates from as many as three more expected in November, according to a Bloomberg News survey this month.

Release of December data for the Fed’s preferred inflation gauge -- a separate measure tied to consumption -- was delayed by the government shutdown. The gauges tend to run slightly below the Labor Department’s CPI measures.

Wednesday’s CPI report had a few quirks, including a 1.1 percent rise in apparel prices that was the biggest in almost a year. Energy prices also had an outsize impact on the headline number with a 3.1 percent monthly drop that was the most in almost three years.

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  • Economists had forecast a 0.2 percent gain in the monthly core gauge and a 2.1 percent annual advance.
  • Housing costs remained a key contributor to inflation. Owners’ equivalent rent, one of the categories designed to track rental prices, and rent of primary residence both accelerated to 0.3 percent monthly gains after rising 0.2 percent in December. Both climbed more than 3 percent annually.
  • The report showed new car prices rose 0.2 percent from the prior month for the first increase since July. Used car prices were up 0.1 percent after declining in December.
  • Apparel prices reflected outsize gains in footwear, which had the biggest increase since 1988, and women’s clothing.
  • Gasoline prices fell 5.5 percent from the prior month and were down 10.1 percent from a year earlier.
  • Food costs climbed 0.2 percent and 1.6 percent annually.
  • Expenses for medical care rose 0.2 percent from the prior month; these readings often vary from results for this category within the Fed’s preferred measure of inflation due to different methodologies.
  • 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.

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