US consumer prices post first drop in nine months

Overall, the report from the Labor Department on Friday pointed to moderate inflation, which could support recent statements by Federal Reserve officials for caution about raising interest rates this year.

“The Fed will take this as further proof that price pressures are building more slowly than some have feared based on the strong growth of late and tight labour market,” said James McCann, senior global economist at Aberdeen Standard Investments. “It certainly seems to justify the Fed’s message about being more patient on rate increases.” The Consumer Price Index dipped 0.1 per cent last month, the first drop and weakest reading since March. The CPI was unchanged in November. In the 12 months through December, the CPI rose 1.9 per cent after increasing 2.2 per cent in November.

Excluding the volatile food and energy components, the CPI increased 0.2 per cent, advancing by the same margin for a third straight month. In the 12 months through December, the so-called core CPI rose 2.2 per cent, matching November’s increase.

December’s inflation readings were in line with economists’ expectations. The CPI rose 1.9 per cent in 2018, slowing from a 2.1 per cent increase in 2017. The core CPI increased 2.2 per cent in 2018, up from 1.8 per cent in 2017.

The Fed, which has a 2 per cent inflation target, tracks a different measure, the core personal consumption expenditures (PCE) price index, for monetary policy.

The core PCE price index increased 1.9 per cent year-on-year in November after rising 1.8 per cent in October. It hit 2 per cent in March for the first time since April 2012.

US Treasury yields held near session lows after the CPI data, while the dollar extended losses against the yen and the euro. US stock index futures were trading lower.

A sharp decline in oil prices amid an oversupply and slowing global economic growth is keeping overall inflation in check.

Lower oil prices are also filtering through to core inflation via cheaper airline tickets.

Gasoline prices tumble

The Fed has forecast two rate hikes this year, but several policymakers, including Chairman Jerome Powell, have said they would be cautious about raising interest rates.

Powell reiterated that view on Thursday, saying “especially with inflation low and under control we have the ability to be patient and watch patiently and carefully” while the central bank monitored economic data and financial markets for risks to growth.

Minutes of the US central bank’s December 18-19 policy meeting published on Wednesday showed “many” officials were of the view that the Fed “could afford to be patient about further policy firming.” Low inflation is also boosting households’ purchasing power, which could keep consumer spending supported.

Inflation-adjusted average weekly earnings surged 0.7 per cent in December, the biggest gain since August 2015, after slipping 0.1 per cent in November. Weekly earnings increased 1.2 per cent in the 12 months to December, the most since July 2016, from 0.6 per cent in November.

Last month, gasoline prices dropped 7.5 per cent, the largest decrease since February 2016, after tumbling 4.2 per cent in November. Food prices increased 0.4 per cent. That was the biggest gain since May 2014 and followed a 0.2 per cent rise in November. Food consumed at home increased 0.3 per cent in December after rising 0.2 per cent in the prior month.

Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, advanced 0.2 per cent in December after rising 0.3 per cent in November.

Health care costs increased 0.3 per cent last month after jumping 0.4 per cent in November. The cost of hospital services surged 0.5 per cent, but prices for prescription medication fell 0.4 per cent and the cost of doctor visits was unchanged.

Apparel prices were unchanged in December after dropping 0.9 per cent in the prior month. Airline fares tumbled 1.5 per cent and prices for used motor vehicles and trucks fell 0.2 per cent after rising for two straight months.

But prices for household furnishings increased, likely because of tariffs imposed by the Trump administration on a range of imported Chinese goods. New motor vehicle prices were unchanged for a second straight month.