US December CPI up 2.1% from a year ago supported by energy prices – RBC Economics

In view of the Nathan Janzen, Senior Economist at RBC Economics, the rise in the year-over-year headline rate (from 1.7% in November) of US was largely a result of an acceleration in energy price growth although the annual increase in core prices also inched higher to 2.2% from 2.1% in November.

Key Quotes

“The headline CPI increased 0.3% on a month-over-month basis.  Energy rose 1.5% from November, boosted by a 3.0% jump in gasoline prices that left that measure up 9.1% from a year ago.  Food prices were unchanged on a month-over-month basis for a sixth consecutive month.”

“Core (excluding food and energy prices) prices increased 0.2% to match November’s pace of increase.  Core price growth continues to be boosted by higher shelter costs (up 0.3% month-over-month and 3.6% year-over-year in December).  Excluding the shelter component, core prices rose 0.2% monthover-month and were up 1.2% year-over-year in December.”

“Our Take:

• Energy prices will likely continue to pressure the headline inflation rate higher in the near-term, given the $30/bbl (WTI basis) levels seen in January and February a year ago.  Beyond energy price volatility, core inflation growth has been steady, with the year-over-year growth rate holding in a tight range of 2.0% to 2.3% since November 2015. 
• That nonetheless leaves price growth right around the Federal Reserve’s 2% objective and continued strengthening in wage growth (which hit a cycle-high 2.9% year -over-year rate in December) should provide reassurance that underlying inflation pressures are trending upward (albeit modestly) rather than downward.
• We expect further strengthening in growth and attendant tightening in labour markets will provide further confidence that the economy is growing strongly enough to withstand further modest rate hikes with our forecast assuming the fed funds target range will end this year 50 basis points higher than the current 0.5% to 0.75% range.”