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U.S. Inflation at Six Month High, Core at Eight Month Low

Posted by Joseph Trevisani on Jan 16, 2014 10:23:00 AM

The cost of living for Americans increased by the most in six months, but the inflation rate closest to the Federal Reserve's preferred analysis fell to an eight month low underlining the constraints the weak economy imposes on the central bank's inflation policy.

The consumer-price index rose 0.3 percent in December following a flat November, according to the Labor Department in Washington, D.C. The increase matched the forecast by economists and was the biggest jump in inflation since June.  The core rate, which excludes food and energy prices and is similar to the Fed's core personal consumption expenditure rate, gained just 0.1 percent, also as forecast, and after a 0.3 percent gain in November. It was the smallest monthly rise in the core since last April.

Prices rose 1.5 percent on the year in December as expected for the slowest increase in three years. The 1.7 percent core rate was the lowest yearly gain since 0.8 percent in 2010, and was the second lowest rate in a decade.

Inflation has failed to meet the Fed's 2.0 percent target for four of the last five years and todays  drop in the  2013 core rate was probably responsible for the more than 3 basis point drop in the yield of the 10-year Treasury after the release.

One purpose of the Federal Reserve’s $85 billion a month in securities purchases, which began in September 2012 at $40 billion a month and added $45 billion that December, has been to head off disinflation, a decline in the rate of inflation, and deflation, an outright drop prices, by increasing the money supply in the economy.

The drop in core inflation from 2.2 percent in 2011 to 1.9 percent in 2012 and to 1.7 percent last year despite the more than $85 billion a month in quantitative easing purchases by the central bank has to make the governors a bit uneasy. Particularly because its own choosen inflation measure, the core personal consumption expenditure index, has also fallen from 1.9 percent in 2011 to 1.6 percent in 2012 and 1.1 percent in November.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts:  Bloomberg





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