US consumer prices accelerate; core CPI posts largest gain in a year

US consumer prices accelerate; core CPI posts largest gain in a year

US consumers
The consumer confidence index rose nearly four points to 138.4, with views about current conditions rising modestly but with a six-point surge in expectations to 115.3, according to the Conference Board's monthly report. (AFP Photo)

WASHINGTON: US consumer prices rose more than expected in January, with a measure of underlying inflation posting its biggest gain in a year, strengthening expectations that price pressures will accelerate this year and prompt a faster pace of interest rate increases from the Federal Reserve.

The fairly strong inflation report from the Labour Department on Wednesday (Feb 14) could put more pressure on US financial markets, which were spooked by a surge in annual wage growth in January.

Inflation concerns sparked a sell-off on Wall Street and boosted benchmark US Treasury yields to a four-year high.

There are fears that inflation, which is seen as being driven by a tightening labour market and increased government spending, could force the Fed to be a bit more aggressive in raising rates this year than is currently anticipated. That would slow economic growth. The US central bank has forecast three rate hikes for this year, with the first increase expected in March.

The Labour Department said its Consumer Price Index increased 0.5 per cent last month as households paid more for gasoline, rental accommodation and healthcare. The CPI rose 0.2 per cent in December. The year-on-year increase in the CPI was unchanged at 2.1 per cent as the large price gains from last year dropped out of the calculation.

Excluding the volatile food and energy components, the CPI shot up 0.3 per cent. That was the largest increase since January 2017 and followed a 0.2 per cent rise in December. The year-on-year rise in the so-called core CPI was unchanged at 1.8 per cent in January, also because of less favourable base effects.

Economists polled by Reuters had forecast the CPI increasing 0.3 per cent in January and the core CPI rising 0.2 per cent. The core CPI is viewed as a better measure of underlying inflation trends. The Fed tracks a different index, the personal consumption expenditures price index excluding food and energy, which has consistently undershot the central bank's two per cent target since mid-2012.


Base effects will turn more favourable in March, which economists say would set the course for higher annual inflation readings. Average hourly earnings jumped 2.9 per cent on an annual basis in January, the largest rise since June 2009, from 2.7 per cent in December.

A pickup in wage growth as the labour market hits full employment is expected to contribute to higher inflation this year. Price pressures are also seen being fanned by fiscal stimulus in the form of a US$1.5 trillion tax cut package and increased government spending.

Last month, gasoline prices rebounded 5.7 per cent after falling 0.8 per cent in December. Crude oil prices surged in January on strong global demand and a weaker US dollar. Food prices rose 0.2 per cent in January, likely reflecting dollar depreciation.

The core CPI was boosted by rising rents. Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, gained 0.3 per cent after rising by the same margin in December.

The cost of healthcare services increased 0.4 per cent, with prices for hospital care jumping 1.3 per cent and doctor visits rising 0.3 per cent. Prices for new motor vehicles slipped 0.1 per cent last month and apparel prices surged 1.7 per cent.

With the January inflation report, the government incorporated some methodology changes which economists say could inject volatility into the data going forward.

Used car prices changed to a single-month price change from a three-month moving average. Smart phones are now quality-adjusted to account for the rapid rate of technological advancements and improved quality to customers.

Source: Reuters