UNITED STATES — The RBC reports there is still not much heat in U.S .inflation—but asks if that is a barrier to further rate hikes?
The December CPI report caps off a year that saw little evidence of tight economic conditions fueling higher consumer prices. The headline rate of 2.1 percent is exactly where it was a year earlier, while core inflation remains stuck below the Fed’s 2 percent objective after having been on the opposite side throughout 2016. That is, despite the unemployment rate falling to 4.1 percent—below most estimates of what the economy can sustain without driving inflation higher. It remains the case that without the impact of one-off factors like a sizeable dip in wireless telephone service prices, core inflation would be right around the 2 percent mark.
But Josh Nye, RBC economist, says, “There is slimited evidence that underlying inflation is actually heating up. That continues to be a sticking point for some members of the FOMC who are reluctant to raise interest rates further in the absence of greater inflationary pressure.”
However, he notes that those on the other side who are concerned about upside risks to the inflation outlook now have a bit more ammunition thanks to the tax cuts passed in December.
He says, “With the economy already running near full capacity, this fiscal boost arguably will need to be offset by tighter monetary policy. A pickup in inflation would certainly help make the case, but even if current price trends hold we think policymakers have to be concerned about falling behind the curve. So while core inflation is likely to remain stuck below 2 percent early this year, we continue to expect the Fed will raise rates again in March.”
Other highlights from the RBC report include:
· All items CPI met market expectations with a 0.1 percent month-over-month increase in December. Lower energy prices limited the gain, unlike November when they contributed to a 0.4 percent headline increase.
· All items inflation edged down to 2.1 percent year-over-year from 2.2 percent in November.
· Excluding food and energy, prices were up 0.3 percent in December—the largest monthly increase since last January. December’s gain was helped by a 0.4 percent increase in the sizeable shelter component.
· Core inflation edged up to 1.8 percent year-over-year in December but has been stuck in a tight 1.7-1.8 percent range over the last eight months.
SOURCE: RBC press release