US: Annual CPI slightly below Fed’s target - RBC CM

The US CPI dropped 0.1% in December. Paul Ferley, Assistant Chief Economist at RBC Capital Markets, explains that the decline had been widely expected given earlier indications that weakening oil prices were putting attendant downward pressure on gasoline prices.

Key Quotes:

“The weakness in energy prices has put the annual increase in overall consumer prices at a slightly ‘below objective’ 1.9% with the core measure is showing greater price pressure rising 2.2%.”

“The headline year-over-year rate has been relatively volatile over the past couple of years largely reflecting the swings in energy prices. In contrast. the annual increase in core inflation has been steadily rising from a recent low of 1.7% recorded November 2017 to the current rate slightly above the Fed’s 2.0% objective. This upward trend matches a similar steady rise in wage gains increasing 3.2% in December up from the 2.7% recorded the year prior.”

“Though the current rate of increase in both measures is not worrisome, it is the upward trajectory that needs to be watched given that the economy is operating beyond capacity.”

“Our expectation is that policy will be tightened modestly further to eliminate this remaining stimulus with the fed funds range eventually rising to 2.75% to 3.00% later this year.”