Energy Prices Push December Inflation Lower

December’s consumer price index (CPI) fell 0.1%, held down largely by a drop in energy prices. Year-over-year increases in the overall CPI slowed to a 1.9% pace in December, the slowest pace in more than a year and a half. The drop in energy prices is expected to reverse as oil prices have been increasing in recent weeks.

Food prices rose at both grocery stores and away from home (in restaurants), matching the hiring pick up we saw in food services in December. Lower prices at the pump allowed consumers a little more leeway to splurge on entertaining at home and eating out during the holidays.

The core (non food and energy) CPI rose 0.2% in December, and held steady at a 2.2% gain from a year ago. Gains in the cost of medical services and shelter were only partially offset by a drop in transportation costs. Airfares plummeted for the second month in a row due to a weakening by business travelers who account for the overwhelming majority of airline profits even though they are responsible for a small percentage of all travelers.

This is important as it could suggest some caution in the business sector, which over the last year has voiced the most concern about the slowdown in global trade and escalation of tariffs. Uncertainty about trade and tariffs are also a reason that in recent weeks the Federal Reserve has grown more “patient” with regard to rate hikes. It’s a foregone conclusion that the Fed will adopt a pause at both its January and March meetings. That shift in mood should become apparent when the Fed issues its statement following its upcoming meeting in late January.

Another problem the Fed must contend with is the delay in the release of critical economic data due to the government shutdown. The only major statistical agency that remains open and collecting data is the Bureau of Labor Statistics, which tracks employment and inflation. The Commerce Department is shuttered, delaying the release of key GDP components, including factory orders and shipments, construction spending, new home sales, and international trade. Next week we will lose retail sales and housing starts. An actual deterioration in the quality of the data or loss of critical information could occur if the shutdown persists much longer.

Bottom Line
The little economic data we have suggests that the economy ended 2018 on strong footing. Concerns about trade and tariffs are not likely to show up as a drag on growth until 2019. However, much of the data that we need to determine how those shifts are affecting the economy is not being collected.

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