Analysts from Wells Fargo, explained that despite the rise in the CPI index in January that includes high numbers in the core index, gain looks a bit overstated given the jump in gasoline and core goods.
“Inflation picked up at the start of the year, with the Consumer Price Index (CPI) rising a stronger-than-expected 0.6 percent. While much of the lift was provided by energy (gasoline prices were up 7.8 percent), prices picked up across a broad range of components.”
“The increase in core goods prices was the largest since late 2009. While this hints that the deflationary pressure from this part of the CPI is fading, last year Fed Chair Janet Yellen was skeptical of a similarly strong rise in core inflation at the start of the year given that it was coming from some of the more volatile components (the goods sector) of the core index. The trend in core services remains fairly steady. Prices rose 0.3 percent last month and are running a little over 3 percent the past year.”
“Today’s move fits with Fed Chair Yellen’s view that inflation is gradually rising. The modest upward trend in core prices leaves the Fed scope to slowly move the fed funds rate higher this year, particularly as the most recent reads on unemployment and labor force participation suggest at least modest amounts of slack remain in the labor market. The Fed’s preferred measure on inflation, the PCE deflator, has turned up in recent months following the rebound in oil, but the core PCE remains below the FOMC’s 2 percent target. Therefore, we continue to expect the Fed’s next rate increase to come at its June meeting.”