Weak Energy Prices Push Inflation Lower

January’s consumer price index (CPI) was unchanged from December, as falling energy prices offset increases in other categories. Prices slowed to a 1.6% year-over-year pace, the weakest reading that we have seeing since June 2017, a period that was also dominated by declining energy prices. All the major indices for energy fell during the month, helping to dampen the blow to consumers who experienced delayed and lost paychecks due to the government shutdown.

Oil prices have remained weak in recent weeks, suggesting that consumers will continue to have more in their pockets after filling their tanks in February.

The core CPI (non food and energy) rose 0.2% during January and rose 2.2% from a year ago. It has held at a 2.2% annual rate since the summer of 2018. Prices held strong in shelter, medical care, recreation and household furnishings. We also saw an unusual jump in apparel prices, but those are unlikely to persist. Airline fares fell in response to lower fuel prices, while vehicle insurance rates abated. We had seen a pick up in insurance costs in 2018 in response to a spike in disasters; specifically, the California fires destroyed numerous vehicles.

Bottom Line
Tepid inflation figures have given the Fed extra wiggle room to move to the sidelines, despite persistently strong job growth. They have decided it is better to pause any action on rate hikes while uncertainty about growth abroad and trade issues remain highly elevated. No one is quite sure how well the US can weather turbulence in international waters.

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