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.