U.S. headline inflation eases in December on fall in energy prices, Fed to hike rates twice in 2019

U.S. consumer prices dropped sequentially in December, coming in line with market expectations. On a month-on-month basis, the headline inflation rate dropped 0.1 percent. The fall was mainly driven by a 3.5 percent decline in energy prices – the largest in nearly three years and a 2 percent fall-off in transportation. On a year-on-year basis, inflation eased to 1.9 percent in December from the prior month’s 2.2 percent.

Meanwhile, core inflation, which excludes food and energy, came in at 0.2 percent sequentially and 2.2 percent year-on-year. The core rate came in line with consensus expectations. Both the prints remained unchanged from November’s outturn. Core goods prices were up 0.1 percent sequentially after rising 0.2 percent in the prior month. Core services were up 0.3 percent, up slightly from the 0.2 percent in November.

The decline in energy prices in recent weeks has led to additional muted inflation dynamics. Inflation closed out 2018 on a comparatively stable footing, implying that it is contained around the Fed’s 2 percent target, noted TD Economics in a research report.

“As 2019 unfolds, rising wages stemming from the tightening U.S. labor market as well as previously imposed import tariffs could alter the inflation picture. Nevertheless, a soft price environment allows the Fed to be patient and maintain its flexibility in responding to the economic data. As such, we expect two rate hikes in 2019, with the first likely in June”, added TD Economics.

At 18:00 GMT the FxWirePro's Hourly Strength Index of US Dollar was neutral at -41.0063. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex