US inflation shows signs of rising cyclical pressure in January

Keith Wade

Keith Wade

Chief Economist & Strategist

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Irene Lauro

Irene Lauro


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US inflation was higher than expected in January with the headline consumer price index (CPI) rising 0.5% month-on-month compared with expectations of a 0.3% gain. The core rate (CPI excluding food and energy) rose by a more modest 0.3% month-on-month, but this was also ahead of expectations of 0.2%.

These changes left the annual rate of CPI inflation stable at 2.1% year-on-year, but the core ticked up from 1.7% to 1.8%.

High energy prices drive January increase

Higher energy prices account for much of the jump in the headline CPI rate in January with the energy index rising 3% on the month. Within the core, the biggest price rises were in apparel, hospital services and motor insurance.

To better identify the source of inflationary pressure we have broken the index into cyclical and a-cyclical components on the basis of how sensitive they are to economic activity. For example, some items such as shelter (housing) respond to the strength or weakness of the cycle whereas others, such as core commodities (goods), are less affected.

On this basis the rise in core inflation in January was almost evenly split between both categories with the contribution from the a-cyclical components slightly greater. The biggest contributor was core commodities. Prior to this report, the a-cyclical component had been weak and is only just moving into positive territory in year-on-year terms (see chart below).

Meanwhile, the cyclical component, which is running at 2.8% year-on-year, has been building up strength in recent months with successively greater monthly gains.

Core inflation likely to accelerate further

The lags from the economic cycle to inflation are quite long and consequently the recovery in growth over the past year is likely to continue to fuel the cyclical component of inflation in 2018. In the absence of a significant slowdown in growth or weakness in the less cyclical parts of the index, core inflation looks set to accelerate further.

Such a development will encourage the Federal Reserve to keep tightening monetary policy (by way of interest rate rises) through 2018 and, given the fiscal stimulus now being poured into the economy, probably well into next year.

CPI breakdown: cyclical inflation leading the way

Source: Thomson DataStream, Schroder Economics Group, 14 February 2018.

*If a core CPI category shows a positive and statistically significant link with real GDP growth, we categorise the item as procyclical. If it does not satisfy this criterion, we categorise it as a-cyclical.

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