• U.S. consumer prices slightly stronger than expected in January.
  • Both core and headline consumer prices posted reasonable gains.
  • Headline consumer inflation declined for the sixth straight month, but remains in positive territory - only just.

U.S. consumer prices rose by 0.3% M/M in January, following the dramatic 0.8% M/M drop in December. Despite the increase on the month, the annual pace of consumer price inflation declined for the sixth consecutive month, falling to 0.0% Y/Y (0.03% Y/Y at 2 decimal places), following the 0.1% Y/Y gain the month before. This is the slowest pace of price increase since the mid-1950s. However, it was nonetheless slightly stronger than the 0.1% Y/Y drop expected by the markets. Core consumer prices were also stronger than expected, rising by 0.2% M/M, which was slightly greater than the 0.1% M/M gain expected by the markets. Year-over-year core inflation declined to 1.7% Y/Y, from 1.8% Y/Y the month before, and was also higher than the 1.5% Y/Y pace expected.

The gains in prices were very broadly-based. There were sizeable increases in energy prices (up 1.7% M/M), while transportation costs (up 1.3% M/M) were driven by the 0.2% M/M gain in car prices and the 6.0% M/M rise in gasoline prices. Medical care (up 0.4% M/M), education (up 0.3% M/M), commodities (up 0.5% M/M), and other goods (up 0.3% M/M) also posted reasonable increases. As a whole, the price of services rose 0.1% M/M. The cost of housing, however, remained flat on the month, though this was more a function of falling utility prices - owner's equivalent rent actually rose on the month.

In the end, this consumer inflation report was slightly stronger than expected by the markets, and does suggest that the pace of U.S. consumer price disinflation may have eased somewhat. In particular, it is noteworthy that the headline inflation number has not fallen below zero as was widely expected by the markets. Nevertheless, with the disinflationary forces remaining well entrenched in the U.S. economy, it is only a matter of time before this outcome is attained. In terms of the Fed, their concerns about deflation will likely ease somewhat.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.