Consumer prices remained unchanged for the third consecutive month allaying concerns that prices would go up, signaling inflation and triggering the Federal Reserve to hike interest rates.
Consumer prices did not meet the consensus of a 0.1 percentage point increase. Prices rose 1.6 percent from a year earlier, the slowest annual inflation since June 2017. Michael Englund, chief economist at Action Economics, blamed the “weak” number on energy prices.
Energy dropped well beyond predictions in all categories with big spills in gasoline and fuel oil prices, slipping down around 10 and 8 percentage points, respectively. This third consecutive month of drops is evidence of slowing global economic growth in Europe and China and the effect of US increased domestic supply.
The drop in energy prices was offset by increases in the costs of food, rent, recreation, clothing, motor vehicles, household furnishings and medical care. Food prices increased 0.2 percent, going up for the third consecutive month.
Consumer prices, less energy and food, met expectations with an increase of 0.2 for the fifth consecutive month, up 2.2 percentage points for the year. The increase was shared across nearly every category and was just enough to eclipse declining energy prices to keep consumer prices unchanged.
The most significant increase was a 0.3 rise in rental costs, a substantial component of consumer prices. One that Ryan Sweet, director of real-time economics at Moody Analytics, calls a very “sticky” number because rent does not normally change month to month for an individual. The 3.2 increase over last 12 months was the result of a temporary dearth in available rental housing units to meet the rising demand.
Significant increases were seen in clothing which jumped 1.1 percent, the largest increase in almost one year. Medical care, another substantial chunk of consumer prices, rose 0.3 percent, a 2.4 increase over the last 12 months.
“There is a modest drift up and the labor market continues to tighten but we will probably get a hike or two from the feds this year,” said Sweet.
Economists are not worried about the economy, they are worried about the Federal Reserve. Inflation has held under the Federal Reserve’s threshold of two percent, 1.6 percent for the last 12 months, the smallest increase since the period ending June 2017. This did not thwart the Federal Reserve from raising interest rates for the past five consecutive quarters, and raising the threshold for target inflation to fall between 2.25 to 2.5.
Everything seems to be creeping up as oil plunges, creating an awkward sweet spot that has left the Federal Reserve patiently head-scratching. Inflation has been hovering, and is expected to remain that way for the next several months. The Federal Reserve has taken a “wait and see” approach, but economists agree that interest rates hikes are inevitable and unwelcome.