U.S. inflation remained mild in January, falling slightly despite sharp increases in home energy prices.
The 0.1 percent month-over-month increase in both the Consumer Price Index and the core index, which excludes volatile food and energy costs, matched the Bloomberg consensus and was consistent with inflation measures over the last six months.
“It’s not remarkably large, it’s not remarkably small – it’s just in line with what we’ve been seeing,” said Peter Morici, an economist at the University of Maryland.
Energy prices, however, exceeded those predicted in many forecasts, with the electricity index seeing its largest increase since March 2010. Although the seasonally-adjusted price of gasoline dropped by 0.1 percent, price jumps in home energy sources like propane, electricity and natural gas more than offset the decrease.
The price of residential propane has spiked in the last four months, driven by a jump in demand from a wet autumn in the Midwest and cold winter weather across the country. Those same low temperatures were responsible for record natural gas prices that are expected to carry forward into February.
“Natural gas was up a lot, but not much more than expected,” said Bill Jordan, senior economist at Wrightson ICAP LLC. “But we really don’t have any input about electricity going into our report, so we assume it is flat, but it was up…that was the big surprise.”
The increase in the core CPI was largely driven by a 0.3 percent increase in shelter costs, in line with expectations. Medical care, recreation, personal care and tobacco also contributed to the rise, while airline fares, used cars and trucks, new vehicles and apparel declined.
Some forecasters, relying on a pattern apparent in six of the last seven months, predicted that January’s core prices would be slightly above the overall trend, a bump that is generally attributed to turn-of-the-year markups across many industries. Weak economic signs at the end of 2013 may have discouraged price increases, said Jim O’Sullivan, chief US economist for High Frequency Economics.
“Whether it’s because of weather or not, that probably would discourage people from testing their pricing power,” he said.
Despite weak job gains in December and January, the Federal Reserve is not expected to change course on plans to taper its bond-buying program by $10 billion a month. Central bank officials have discussed changing a formal 6.5 percent unemployment threshold for raising interest rates, but concerns about low inflation will likely discourage rate hikes in the near future.
With an increase of only 1.6 percent over the last 12 months, inflation is still below the Fed’s goal of a 2 percent annual pace, but Fed officials have remained optimistic about the economy’s prospects for growth in the early quarters of 2014 and are unlikely to change the Fed’s position without evidence of a more significant downturn.
“They’re effectively on autopilot on tapering, so there’s no reason why these numbers would divert them on that,” said O’Sullivan. “They’re just more of the same.”