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Inflation's January Jump

Energy prices are still in the driver's seat when it comes to U.S. inflation data. The January overall consumer price index, released Feb. 22, showed a jump of 0.7% in the headline figure, above the 0.5% median forecast of economists, thanks to a 5.0% rebound in energy prices. The core index, which excludes food and energy prices, rose 0.2% (median 0.2%). These gains followed December figures of -0.1% for the overall index and 0.1% (as recently revised) for the core.

The data are broadly consistent with the strength seen in recent reports on trade prices and the producer price index, and support the more aggressive Fed policy outlook that has crept into the market over the past few weeks.

HEADLINE BOUNCE. The rise in energy prices was led by a 6.4% jump in gasoline prices. Food prices were up 0.5%, while apparel was up 0.3%. The core index was held back by a modest 0.1% gain in both shelter and medical care. New vehicle prices, however, rose 0.6%.

The U.S. CPI headline bounce in January left a surge in the year-over-year measure to 4.0% from 3.4% in December. Though this rate may trend back toward 3% by April if current energy prices hold, the risk is that these headline year-over-year rates will remain above 3% through at least midyear, if global economic growth remains robust.

Headline inflation has consistently outpaced core inflation, which now sits at 2.1%, since 2002, when the post-September 11 drop in oil prices scrolled off the year-over-year measure. Before that, energy has added positively to domestic inflation since 1999, adding to the belief that energy prices shouldn't be simply "X-ed out" of U.S. inflation measures.

SEASONAL STRENGTH. The January report sent a similar message to that seen in the PPI and trade price reports of big overall price gains in January that were led by energy price increases. This tone should be repeated with the personal consumption expenditure (PCE) core price measures for January to be revealed at the end of February. We at Action Economics expect these measures, on both a market-based and chain-priced basis, to show overall gains in the 0.5%-0.7% range, but with core gains in the 0.1%-0.2% range.

It looks like we are again seeing seasonal strength in the U.S. inflation measures as we enter the first quarter, though an unwind of energy prices in February suggests that we may see some reprieve in the next round of reports. More generally, if energy prices remain firm through the year as a whole, it seems inevitable that persistently large gains in the overall price level will eventually place upward pressure on core rates.

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