Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, speaks during a Bloomberg Television interview in Richmond, Virginia, U.S. (Photographer: Jay Paul/Bloomberg )

Underlying U.S. Inflation Picks Up to Keep Fed Hike on Track

(Bloomberg) -- A key measure of U.S. inflation picked up as expected in November on rising costs for housing, medical care and used cars, reinforcing expectations that the Federal Reserve will raise interest rates next week.

The so-called core consumer price index, which excludes volatile food and energy costs, rose 0.2 percent from the prior month and 2.2 percent from a year earlier, according to a Labor Department report Wednesday. That matched the median estimates in a Bloomberg survey of economists. The broader CPI was unchanged from the prior month, also in line with projections, as energy prices plunged.

Underlying U.S. Inflation Picks Up to Keep Fed Hike on Track

The report indicates underlying inflation is steadying around the Fed’s 2 percent goal, without flaring up, as prices get support from the recent pickup in wages as well as higher materials costs amid the tariff war with China. Still, investors and economists are divided about the path of interest rates beyond a widely projected hike at the central bank’s Dec. 18-19 meeting.

While the CPI report “cements a rate hike next week,” the Fed “will have a window to pause in the first half of 2019,” said Ryan Sweet, head of monetary policy research at Moody’s Analytics Inc. in West Chester, Pennsylvania. “Risks to the Fed’s inflation outlook are weighted to the downside” amid falling energy costs and sliding price expectations, which indicate that “inflation isn’t going to create any more sense of urgency for future hikes,” he said.

A December rate rise continued to be priced as a near certainty by the market, even after President Donald Trump on Tuesday saidthe Fed “would be foolish” to proceed with an increase, continuing his public campaign against further hikes in borrowing costs.

November figures for the Fed’s preferred gauge of inflation, a separate measure related to consumption, will be released on Dec. 21. The Fed-preferred index and its core gauge tend to run slightly below the Labor Department’s CPI measures.

The annual core CPI increase was higher than the 2.1 percent reported for October, though overall CPI inflation slowed to 2.2 percent from 2.5 percent. The broader cooling reflected a 2.2 percent monthly drop in energy prices, including a 4.2 percent decline in gasoline, both the biggest decreases since March.

What Our Economists Say...

The recent nosedive in oil prices will weigh on headline inflation in the coming months, as it did in November, but is unlikely to move the needle for core inflation in 2019. We estimate core CPI growth will accelerate to a pace that would imply above-2% growth in core PCE -- the Fed’s preferred inflation measure.

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

Read more for the full reaction note.

Fed officials have increasingly emphasized they’ll depend on incoming economic data to guide policy. Fed Vice Chairman Richard Clarida recently said it’s “important to monitor measures of inflation expectations to confirm that households and businesses expect price stability to be maintained.”

A couple of items had a relatively outsize impact on the core CPI: Used-car prices rose 2.4 percent from October, the second straight big increase, amid volatility partly resulting from a change in methodology. Much of that was offset by a 2.2 percent drop in prices for wireless phone services, the largest decline since March 2017.

New car prices remained relatively tame: They were unchanged from October, the fourth straight month without an increase.

Pantheon Macroeconomics chief economist Ian Shepherdson said the reported increases in used-car prices don’t square with data from vehicle auctions. That suggests that used-car costs in the CPI may “fall sharply over the next few months,” dragging down core inflation, though a tighter labor market will keep putting upward pressure on prices, Shepherdson wrote in a note.

A separate report released Wednesday by the Labor Department showed average hourly earnings adjusted for inflation rose 0.8 percent from November 2017, the biggest increase in more than a year. Wage gains have gradually picked up amid a tight job market, while muted inflation overall may have brought some respite to consumers.

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  • Shelter costs, which account for about a third of the CPI, rose 0.3 percent from the prior month following a 0.2 percent gain. That reflected increases in both owners-equivalent rent, one of the categories designed to track rental prices, as well as rent of primary residence.
  • Prices for medical care rose 0.4 percent, the most since June; 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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