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US consumer prices saw no change according to today’s Consumer Price Index (CPI) report which points to very tame inflation and may impact Federal Reserve policy regarding interest rates.

Key Takeaways

• The CPI indicates the smallest annual increase in inflation in well over a year at 1.6%.
• The tame inflation figures could make it easier for the Federal Reserve to hold off on interest rate hikes.
• The CPI was kept down overall by falling gasoline prices, offsetting increases in the cost of food and rent.

Consumer prices held firm for the third consecutive month in January according to the latest figures from the US Labor Department, with a 1.5 year low in inflation. The CPI rose 1.6% in the 12 months through January, the smallest gain since June 2017. For comparison, the CPI increased 1.9% annually in December.

The core CPI, which excludes the volatile elements of food and energy, rose by 0.2% as expected, making it the same result five months in a row. In the 12 months through January the core CPI rose 2.2% for the third month in a row.

An Unlikely Inflation Indicator

Inflation is typically measured by the core PCE price index, data for which was delayed during the five-week partial shutdown of the US government. The core PCE price index rose 1.9% in November on an annual basis after rising 1.8% annually the month before and reaching the 2% target range in March for the first time since 2012.

The PCE data for December will be released on March 01 – the increases in the CPI are unlikely to signal a major shift in underlying inflation.

The Fed has kept interest rates unchanged after signaling last month that it would hold off, with chairman Jerome Powell stating that the central bank would be “patient” with future rate hikes. Yesterday Kansas City Fed President Esther George, a longstanding hawk when it comes to monetary policy, explained her more dovish approach when voting for the signal, stating that the Fed should pause rate hikes to monitor the effect they have on the US economy.

Meanwhile Cleveland Fed President Loretta Mester signaled an end to the Federal Reserve’s balance sheet runoff, hinting that the central bank will halt the policy of leaving matured bonds going un-replaced to reduce the central bank bond portfolio over time.

Inflation in the US is moderate despite the tight labor market, likely due to downward economic pressure in other areas as a result of trade expansionism and a general economic slowdown coming into paly worldwide.

Still waiting for inflation. Monthly CPI flat and core CPI up 2.2% year over year. Justifies Fed’s wait and see attitude with regards to future rate hikes.

— Paul R. La Monica (@LaMonicaBuzz) February 13, 2019

CPI Figures

In January, the price of gasoline fell 5.5% after dropping 5.8% the month before. Food prices increased 0.2% after a 0.3% increase in December, with food consumed at home rising 0.1%. The cost of rent rose by 0.3% after a 0.2% increase the month before.

Healthcare costs jumped 0.2% in January after December’s increase of 0.3%, and the cost of clothing jumped a more significant 1.1%. Air fares dropped by 0.9%.

Expert Outlook

Nick Kilbey, Sales Trader at Foenix Partners, says the Fed can afford to pause interest rates if inflation remains tame.

“Whilst another round of trade talks between the US and China are keeping investors on edge this week, US Inflation provided a distraction as it dropped to 1.6%, the smallest print since June 2017, with lower energy costs the main culprit once again.

So far, economic growth in the US has moderated only marginally and the economy remains robust, despite the ongoing dispute with China. However, with broader inflation at 1.6%, it certainly underscores the Fed’s “wait and see” stance and their ability to remain patient.”

Capital Economics stated that falling fuel prices were boosting the US economy, saying “Gasoline prices fell by 5.5% month-on-month in January, the third consecutive monthly decline of around that magnitude. However, piped natural gas prices fell by only 0.3% m/m, which barely began to reverse the 5.1% m/m spike in December. With natural gas prices falling sharply, CPI piped gas will drop more markedly in February.”

St Louis Fed President James Bullard has spoken out against the Fed’s inability to meet inflation targets, and has even advocated cutting interest rates rather than simply holding off – data like today’s CPI report supports his view.

Market Reaction

Gold has been ticking upward following the report, barring some soft activity attributable to typical volatility. Spot gold last traded at $1,317.70/oz. The report is not inherently bullish for the price of gold, but nor were the results particularly unexpected.

The most significant aspect of the report is the possibility for it to justify an elongated pause in rate hikes, or even, as has been suggested by certain policymakers, rate cuts.