Consumer prices rose for the first time in six months in January, increasing 0.3% following particularly large declines of between 1% to 2% during the last three months of 2008. These earlier large declines reflected tumbling gasoline prices. Markets had expected the January CPI to rise 0.3% in the month on indications that gasoline prices had started to trend up going into 2009. These earlier price declines contributed to the year-over-year remaining low in January at 0.0% despite the monthly increase.

Core prices, which eliminate the effect of energy and food prices, rose 0.2% in the month after showing no change in December. This was slightly stronger than the 0.1% expected within financial markets. This did not prevent the year-over-year rate falling slightly to 1.7% from 1.8% in December.

The report showed that a number of components reversed declines recorded in December. For example, new vehicle prices rose 0.3% in January after a 0.3% decline the previous month. This increase occurred despite autos sales sinking to an abysmal 9.5 million units, at an annualized rate, in January. As well, apparel prices rose 0.3% following a 0.6% decline in December. Some offset to this upward pressure came from airfares which fell 2.1% in the month.

Today's CPI report showed a return to price gains after five months of decline largely reflecting the trend in gasoline prices that steadily dropped through the final quarter of 2008 before moving up going into 2009. These earlier declines contributed to the year-over-year rate barely remaining positive the end of last year rising only 0.1% in December and contributed to a 0.0% rate in January.

Even excluding the volatile energy and food prices, price increases, though higher, remain relatively benign with so-called core measure up only 0.2% in the month and 1.7% over the past year. This will allow the Fed to remain focused on keeping policy very accommodative as it attempts to limit the extent and depth of the recession. With official interest rates already as low as they can go with Fed funds targeted in a range of 0% to 0.25%, the central bank will continue to address pressures in the financial system and attendant high market interest rates by directly injecting liquidity as needed via so-called credit easing.

RBC Financial Group

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.