U.S. consumer price inflation rises modestly in December, core rate rises surprisingly

U.S. consumer price inflation rose modestly in December. The headline index rose 0.1 percent, hampered by a 1.2 percent fall in energy prices. On a year-on-year basis, inflation dropped to 2.1 percent from 2.2 percent in the prior month.

Energy prices dropped in December after contributing to the headline figure in the prior month. The fall in energy prices is driven by a 2.7 percent fall in price of gasoline. The overall food index was up 0.2 percent sequentially. Food inflation has been rising gradually through 2017, ending the year at 1.6 percent year-on-year after beginning the year in deflationary territory.

However, core inflation came in stronger than expected in the month. The core rate rose 0.3 percent, following a soft 0.1 percent rise in the prior month. This lifts the year-on-year core inflation rate to 1.8 percent in December. For eight straight months, core inflation has lingered in the 1.7 percent to 1.8 percent range.

Within core prices, price pressures rose in services as well as in goods. Shelter was up 0.4 percent, contributing 80 percent to the all items rise and reflecting price pressure for rent, lodging away from home, and owner occupied housing. Core services were up 0.3 percent, a slight rise from November.

Core goods prices rose 0.3 percent, driven by increased prices for used cars, prescription drugs and new vehicles. Vehicle prices have been raised by increased replacement demand in the wake of Hurricanes Harvey and Irma. On the other side, prices for apparel, airline fares and tobacco dropped over the month.

The inflation data released today gives evidence that inflation pressures are indeed beginning to fall into place, noted TD Economics in a research report.

“Today's data leads us to pull forward our expectation for the next rate hike to March”, added TD Economics. 

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