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Falling energy prices have contributed to a cool down in inflation, but the so-called core consumer price index which excludes volatile food and energy prices held firm, pointing to overall stability.

Key Takeaways

• Housing and medical care are among the stabilizing factors that contributed to consistent price increases.
• Major drops in the cost of gasoline and energy caused the main inflation index to drop.
• The core Consumer Price Index rose 2.2% annually and 0.2% from November to December.
• Including food and energy the CPI cooled to 1.9% annually and dropped 0.1% from the month before.

Energy and gasoline costs hit a 3-year low, causing the CPI to cool down in December. The rate of inflation is technically still within the Federal Reserve’s target range, with rising wages and inflated costs over the ongoing trade war contributing to higher prices.

Last month it was indicated that two rate hikes were due in 2019 following four in 2018, but Fed chairman Jerome Powell recently stated that the central bank would take a cautious and flexible approach depending on economic conditions. The government shutdown is sure to be influencing monetary policy, and it seems likely that the Fed will hold off until March which is when the tariff ceasefire between Washington and Beijing draws to a close.

US headline #inflation eases a bit less than what we expected to 1.9% (instead of 1.7% which was our estimate). Main reason for resilience: Upside pressure on medical care prices.
We expect a further drop in inflation to 1.6% through January 2019 pic.twitter.com/5jAMhKZ0xF

— Marc Brütsch (@MarcBruetsch) January 11, 2019

Sector Inflation

The cost of rent and shelter which accounts for one-third of the CPI rose 0.3% for a second month, with growth of 0.2% in owners-equivalent rent and rent of primary residence. Meanwhile the cost of staying in hotels or motels saw the biggest increase since May.

Energy prices fell 3.5% from the previous month and gasoline prices fell 7.5%.

Food costs increased by 0.4%, the biggest jump since 2014, with the biggest increase in full-service restaurant prices since 2011.

Used car prices dropped 0.2%, the first decline in three months with global decline of the auto industry triggered by emissions tests brought about in the wake of the Volkswagen emissions scandal.

Clothing prices were technically unchanged, although given the holiday sales it is believed that women's clothes increased and men's’ clothes decreased in cost.

With a 1.9% annual gain and a 0.1% monthly drop in the broader CPI as well as a core CPI reading of 2.2% gain annually and 0.2% monthly, the data is in line with economic predictions.

Expert Outlook

Fed Vice Chairman Richard Clarida said “inflation has surprised to the downside recently, and it is not yet clear that inflation has moved back” to the target range in a sustainable manner.

Market Reaction

Gold is trading up 0.38% in the wake of the data which shows, despite moderate uncertainty for the future, a relatively stable rate of inflation and an unchanged core CPI. Spot gold last traded at $1,289.58/oz with a high of $1,295.22/oz and a low of $1,286.22.