- The U.S. Consumer Price Index fell -0.4% mom in December as the sharp drop in oil prices continued to make its mark. Petrol prices fell -9.4%in the month and are down 21% over the year. This result took the annual rate of CPI inflation down to 1.2% yoy.
- Central banks will focus on the extent to which lower oil price feed through into the prices of goods and services beyond the fuel pump. The December data shows clear evidence of some flow through with core inflation flat over the month. The annual rate of core inflation is now +1.6% although the last three months shows an annualised increase of just +1.1%.
- The split of core prices into goods and services gives us some confidence the low core inflation result is fuel related. Services prices showed a small rise over the month while goods prices declined. Goods price seem more likely to be impacted by lower transportation costs and the recent strength in the USD.
- We expect to see further softness in core inflation in the months ahead. While a pickup in spending on the back of lower oil prices appears likely, businesses don't yet have sufficient pricing power to expand margins.
- We know the FOMC won't wait for inflation to be at 2% before raising rates, but they will want to be sure there is a solid floor under core inflation before starting to tighten.
- With likely further pass through of lower oil prices into core inflation in the months ahead, coupled with still low wage growth, it may be later than mid-year before the FOMC feels sufficiently confident that inflation is returning to target to increase interest rates.