Fed Eyeing Better Than Expected January Inflation Data

Core consumer prices – those that exclude the volatile food and energy categories -- rose more than expected in January, perhaps supporting the Federal Reserve’s longstanding prediction that inflation will gradually rise toward the central bank’s 2% target.

Equally important, the data suggests the Fed might still keep in place its plan to normalize U.S. monetary policy by continuing to raise interest rates through 2016 and beyond despite recent headwinds caused by fears of a global slowdown.

It remains to be seen whether the January numbers represent a trend or a blip, as some economists believe.

In terms of overall inflation, the wildcard is energy prices: If the price of oil continues to hover at its lowest level in decades, overall inflation will remain stubbornly weak.

Energy prices are down 6.5% from a year ago with the 29% year-over-year drop in gasoline prices imposing a significant drag on headline CPI inflation, analysts at research firm Oxford Economics said in a research note.

The Oxford Economics analysts added that despite to positive January data, it “would be wrong to assume the energy drag is completely behind us as it will likely linger through 2016. As such, headline CPI inflation will likely fall back below 1% year-over-year by mid-year.”

The January figures were boosted by rising housing and medical costs, helping to lift core inflation the most in four and a half years.

In the 12 months through January, the core CPI rose 2.2%, adding to gains made in December when the CPI increased 2.1%. Economists had forecast core CPI up 0.2% last month and increasing 2.1% from a year ago.

Both the January and December CPI numbers support the Fed’s contention that a strengthening labor market will lift wages and eventually push consumer prices higher. A certain amount of inflation is a sign of a healthy economy in that it reflects rising wages due to a tight labor market.

But weak wage growth has been an Achilles heel of the U.S. economic recovery in the wake of the 2008 financial crisis. U.S. workers haven’t seen significant increases in hourly wages even as monthly job creation has been healthy and the unemployment rate has fallen to 4.9%, half the level it reached during the worst of the economic downturn.

Wages began to show signs of life late last year and those numbers are now being reflected in CPI numbers.

Last month, the rental index rose 0.3% after a similar gain in December. Medical care costs rose 0.5%, with prices for prescription drugs also increasing 0.5%. The cost of doctor visits edged up 0.1% after falling 0.2% in December. Hospital costs increased 0.4%.

Apparel prices rose 0.6% after falling for four straight months. The increase in apparel is noteworthy because retailers have been offering deep discounts to unload surplus inventory. Prices for new motor vehicles rose 0.3%.

Gasoline prices fell 4.8%, while food prices were unchanged.