CPI Shakes Rather Than Stirs Fed’s Confidence in Inflation Outlook

The Consumer Price Index (CPI) rose 0.3% over last month and 3.1% over the prior year in January, according to the Bureau of Labor Statistics.

Ryan Sweet, chief US economist at Oxford Economics offers the following analysis:

• The consumer price index rose more than either we or the consensus expected in January, but a single month will not significantly rattle the Federal Reserve’s confidence in the near-term inflation outlook. A stronger conviction that inflation is on a sustainable path toward the central bank’s 2% target is a necessary condition for it to justify lowering the target range for the fed funds rate.
• We did not believe a March cut was likely, instead we expect the first rate cut in May after plenty of inflation data is released. Therefore, the January CPI does not warrant a change to our assumptions around monetary policy but lends some upside risk to the inflation forecast this quarter. It is also important to remember that the Fed does not target the CPI, but uses the PCE deflator instead, and it has been running cooler than the CPI.
• Inflation remains volatile but one concern for the Fed is that the recent gains in consumer prices have been concentrated in the less volatile categories of goods and services, suggesting that inflation may be a little stickier than some Fed officials thought. The good news is that some relief is on the horizon as nominal wage growth is decelerating and alternative measures of rental inflation point toward significant relief on the horizon.
• There was not a lot of good news in the January CPI as core inflation and supercore came in hotter than expected. Rental inflation accelerated m/m and these prices are normally sticky. For supercore inflation, transportation services contributed to the bulk of the y/y increase, accounting for nearly half.
• The conflict in the Middle East and El Nino have caused significant disruptions to global shipping, and the US is not immune to the negative effects, including higher prices for goods. The January CPI likely captures little of the recent run-up in global shipping costs. Our new forecast raised the outlook for core goods inflation this year but only modestly, and the peak impact occurs in Q2 and Q3. We assume that the shipping disruptions will persist for six months, but it lends upside risk to the near-term inflation forecast.