The consumer price index was unchanged in January, falling modestly below expectations for a 0.1% increase. Excluding food and energy, core CPI rose 0.2% for the month, consistent with the consensus forecast.
The headline CPI has now been flat for three consecutive months, driving the year-over-year increase down to 1.6%, while core inflation held firm at 2.2% for the fourth time in five months.
The sustained decline in energy prices in recent months has played a key role in keeping headline inflation in check, as global growth has slowed, reducing demand. That has extended to other commodities as well, providing some relief in price pressures.
Shelter costs, which represent a third of the index, rose by 3.2% over the past year. Both the magnitude of the increase and its significant weighting make the trend in rental expenses a critical driver of core inflation.
With the Fed taking clear steps to send a more dovish message to the markets, slower growth and an easing in inflation pressures should allow for a slower pace of interest rate hikes than the central bank had been projecting for much of the last few years.
Although job creation remains strong, increasing labor force participation has provided some relief to labor markets and wage pressures as well. The return of a notable number of individuals to the labor force has provided an improved supply of potential workers for employers who were finding the hiring process to become increasingly difficult.
The recent uptick in unemployment isn’t a sign of weakness in labor demand, but improved supply. If the economy continues to grow and create jobs at a solid pace, that expanded pool will also eventually dry up, but better labor force growth will help to contain wage pressures for a while, and also help to restrain broader inflation readings.
The bottom line is that inflation still appears to be well in check, aided in part by weakness outside the U.S. That should be enough for the Fed to be able to take time to evaluate the gradual effects of its prior rate hikes and move more slowly and thoughtfully in administering rate policy in the months ahead.
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