- US consumer prices fell -0.7% in January, their third consecutive decline. A further decline in energy prices was the key contributor to the weakness. This has pushed the annual rate of headline inflation into negative territory with a reading of -0.1%.
- The more important core inflation measure came in modestly stronger than expected at +0.2% over the month and +1.6% for the year. Core goods prices remain weak with the annual rate of increase running at -0.8%. That’s thanks to the stronger dollar and some degree of spillover from lower petrol prices into lower costs of transportation of goods.
- However core services inflation is looking increasingly sturdy. That component (which makes up about 60% of the CPI) was up +0.3% over the month and +2.5% over the year. That’s a sign of an economy that is continuing to strengthen and supports our contention that as output gap closes in the US, inflation will become broader based.
- Energy prices have stabilised recently and petrol prices have risen over February in the US. That supports Janet Yellen’s testimony at Congress this week where she said that many of the factors holding inflation down are likely to prove temporary. So while headline inflation looks set to remain low for a few months yet, that won’t stop the FOMC from beginning the interest rate normalisation process. But it does mean they can be a bit more patient.