Inflation pressures in America remained muted last month, according to a few new reports from the Bureau of Labor Statistics. For example, the consumer price index (CPI) rose by 0.2 percent in December and 2.3 percent over the past year. One factor behind the headline increase last month was the cost of food, but such gains remain concentrated in the food-away-from-home component, i.e. dining out. This is consistent with services still being the main driver of household inflation in America, whereas goods prices are essentially flat over the past year. Moreover, price changes for the goods that correspond to items subject to tariffs added only 0.02 percentage points to the year-over-year change in CPI in December, according to Wells Fargo estimates, down from 0.1 earlier in 2019.
This suggests that the trade war’s effect on goods inflation (for consumers) has so far been minor and is perhaps even fading as tensions ease. However, policymakers should remember that businesses will not be able to absorb such levies forever. For now, though, consumer inflation in America appears contained around the Federal Reserve’s 2.0 percent “target,” with CPI just above and other measures below. For the latter, the core producer price index (PPI), a gauge of wholesale price pressures also released this week, rose by just 1.1 percent over the past twelve months, and the Fed’s preferred inflation measure, the PCE deflator, is up only 1.6 percent (through November). Both metrics could drift higher this year due in part to the reasons outlined in our 2020 economic outlook, especially if there is some spillover from the CPI’s recent uptick in medical care costs. Altogether, Fed officials will likely allow inflation to overshoot their target for the foreseeable future, or at least until the pickup in wage growth becomes more substantial, in turn meaning that there should not be a reversal of 2019’s “insurance cuts” occurring anytime soon.
Sources: Econoday, U.S. DoL, U.S. DoC, Wells Fargo, FRBSL