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Plummeting energy costs have brought the United States’ its first annual decline in

consumer prices since October 2009. But core inflation proved stronger than

expected, suggesting overall inflation could pick up once oil prices stabilize.


The consumer-price index (CPI), a measure of what Americans pay for

everything from cupcakes to chemotherapy, fell by 0.7 percent in January from

December, according to data released by the Bureau of Labor Statistics Thursday



That decline was driven almost entirely by a 9.7 percent plunge in energy

prices. Excluding the uniquely volatile costs of food and energy, so-called “core”

prices actually rose .2 percent in January. And while consumers may have saved

at the pump, they spent .4 percent more on transportation services, and .3 percent

more on shelter.


These figures were roughly in line with expectations, as overall inflation

came in .1 percent lower, and core inflation .1 percent higher than was forecast by

Bloomberg’s survey of 87 economists.


But while the data was predictable, its implications for interest rates

remain uncertain. On Wednesday, Federal Reserve Chair Janet Yellen said that

the central bank would consider raising rates before inflation reached its target of

2.0 percent, but only “if we gain confidence and continue to see the labor market



That “confidence” won’t come until The Fed is certain that weak inflation

is solely the product of oil’s aberrant decline. In her testimony before Congress

this week, Yellen did say that “the softness of inflation” largely reflected “the

transitory effects of lower energy prices” but she also noted that core inflation has

“also slowed since last summer, in part reflecting declines in the prices of many

imported items and perhaps also some pass-through of lower energy costs into

core consumer prices.”


The resilience of core inflation in January may ease anxieties of a

deflationary “pass-through,” and clear the way for a rate hike as early as June. Or

the first annual decline in CPI since 2009 could strengthen the resolve of those

within the bank who prefer to put off the first increase until the fall, depending on

how one reads the tea leaves.


“I think Yellen’s hinted very strongly that the June meeting remains the

target for raising rates,” said Josh Shapiro, chief economist for Maria Fiorini Ramirez

Inc., “The Fed fully expects inflation to fall before it rises again, so I don’t see any

reason to think that first raise is going to change.”


Others believe the Fed will prove more cautious.


“Future markets are suggesting that oil prices are actually going to rise

from these levels,” said Lewis Alexander, Chief Economist at Nomura Investment

Bank, “If that’s correct then that negative effect from energy is going to wane pretty

quickly, and the dollar has sort of stabilized over the last month.”

Alexander believes the Fed will wait for the price of oil and the value of the dollar to

stabilize, reserving its first rate increase for September.


Ultimately, the bank may find itself less concerned with the weakness of

inflation than the weakness of economic growth; Thursday morning also saw an

unexpected jump in weekly jobless claims.


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