By Harini Chakrapani
Americans paid more for rent and medical care in January-driving inflation and alleviating worries of a slowing economy.
The Consumer Price Index, a measure of prices of everything Americans buy from meat to medicines, was flat in January after falling in December. Prices were up 1.4 percent from a year earlier, the fastest growth since November 2014.
The report bodes good news for the Federal Reserve which studies the CPI closely. A growth in inflation indicates consumers are spending more money and consuming more goods and services, providing a boost to the economy.
CPI (all items) Jan2015-Jan2016 seasonally adjusted, one month percent change
Source: Bureau of Labor Statistics
The Labor Department’s core CPI which excludes volatile food and energy goods rose 0.3 percent, the fastest one-month increase since August 2011 and ahead of economists’ expectations.
Robert Brusca, chief economist at Fact and Opinion Economics said the increase was driven by rising rents and higher prices in the service sector.
Rent index rose a seasonally adjusted 0.3 percent, while the medical index gained substantial momentum at 0.5 percent from last month’s 0.1 percent.
CPI index for rent and medical care Jan2015-Jan2016 seasonally adjusted, one month percent change
Source: Bureau of Labor Statistics
Jim O’Sullivan, chief U.S. economist at High Frequency Economics attributed the rising rent costs to demand from a large section of employed Americans.
“The rental vacancy rate has dropped sharply. This reflects the pickup in employment growth,” he said referring to the record low 4.9 percent unemployment rate since the recession.
Apart from rent and medical care, the core CPI also showed price increases in January for airline fair (1. 2 percent month over month) and apparel (0.6 percent month over month).
However, the uptick in these costs was offset by low oil prices, available at just over $30 a barrel. The overall energy index continued to remain weak at -4.8 percent in January and -6.5 percent (year over year).
The overall food index, which in recent times has seen plunges due to the surplus outputs of milk, soybean and corn, showed no change from December figures. While prices for meat, poultry, fish and eggs remained low; fruits and vegetable costs saw increases (1.3 percent, seasonally adjusted over the last 12 months).
A spike in inflation could set the stage for the Fed to raise interest rates in March in order to achieve its target 2 percent inflation- a mark of a healthy and strong economy. However, economists’ remained skeptical.
“I do not believe the rate of consumer inflation will reach the Federal Reserve’s 2 percent goal in 2016 or 2017,” said Hugh Johnson, chairman and chief economist at Hugh Johnson Advisors adding that the CPI would only reach 1.8 percent by the fourth quarter in 2017.
Brusca said in order to make interest rate decisions the Fed preferred the personal consumption expenditures index (PCE) and not the consumer price index.
The PCE has remained steady- coasting around the 1.5 percent mark since April 2013 and hasn’t picked up pace as the CPI.
Overall, the economic data has been perplexing. While more Americans are employed today with money to spend, prices of goods and services haven’t increased as expected.
Brusca said inflation was a complex phenomenon. While the rent and medical costs were high, the CPI was still being held in check by the low energy prices and international competition.
“There’s a lot of turbulence within the CPI index, a lot of forces and counter forces, but the inflation part of the report is going to win. The question is how fast are they (prices) going to rise,” he said.