Inflation Warms

The Consumer Price Index (CPI) rose 0.1% in January or 2.5% from a year ago, its fastest pace in more than a year. Increases in shelter, medical care and transportation costs were only partially offset by a drop in energy prices. Apparel prices rose during the month but are still down from a year ago. New vehicle prices were also down for both the month and year.

The biggest reason for the acceleration of the year-over-year measure of the overall CPI was energy prices. They were still up at a double-digit rate from a year ago in January, despite the move down on a month-to-month basis. Oil prices have since fallen much more aggressively in response to quarantines and the blow to demand associated with the novel coronavirus in China. The blow to travel and production is now spreading outside of China.

The core CPI (excluding food and energy) edged up 0.2% in January and rose 2.3% from a year ago. Year-over-year measures of inflation have been stable at a 2.3% pace for the last four months. Shelter, medical care costs and prescription drug prices are keeping core CPI inflation elevated. Prescription drug cost and health care more broadly top the list of concerns for voters in an election year. Complaints about the cost of housing are also rising. Homelessness has jumped in recent years, despite a drop in the unemployment rate.

Bottom Line

Overall inflation moved up in January, but much of the increase will be temporary. A sharp drop in oil prices has already occurred and will put a lid on gains in February. The flight to safety associated with the coronavirus outbreak has also put upward pressure on the value of the dollar, which will be another check on overall inflation later this year.