US inflation: Pace only moderate, despite upward pressure from energy prices

The January data on inflation in the USA only appeared to fuel fresh fears on financial markets at first sight. The increase in consumer prices by 0.5 percent on the previous month turned out somewhat higher than expected. The main reason for this is the unexpectedly strong upward boost that came from energy prices. Nevertheless, despite this additional altogether strong stimulus, no change can be noted in the annual inflation rate, which remained unchanged on December at 2.1 percent.

However, the actual domestic inflation rate is more accurately measured by the core rate, which covers price developments excluding energy and food. The month-on-month change rate of +0.3 percent turned out slightly higher than in preceding months, but there was nothing particularly surprising about this for the first month of a calendar year. Despite seasonal adjustment, a slightly stronger momentum can often be noted particularly in January, especially among prices for services. This was also the case in the most recent reporting month, particularly for healthcare costs. Compounding this were weather-related strong price increases in the clothing segment following a steady decline in prices here in the preceding months. Nevertheless, the core rate also does not reveal any acceleration in inflation compared with the same month of the previous year, as this also remained unchanged on December at only 1.8 percent.

The latest figures therefore give us no cause to change our inflation outlook. Nor do we see any need for monetary policy to be tightened more quickly. This month the uptrend on crude oil markets came to a halt, with petrol prices in the USA recently in decline again slightly. In the further course of the year, the inflation rate is therefore likely to rise at a comparatively moderate pace, assuming a generally robust economic climate. In annual average terms, we expect a rate of 2.3 percent which would thus slightly exceed the prior year reading of 2.1 percent.

This is also based on our assumption that wage increases will only accelerate slightly in coming quarters, despite the continued robust uptrend in employment. Decelerating factors such as advances in automation, the higher significance attached by employees to solidity and security, the empty coffers in the public sector and the almost de-coupled development of part-time wages are likely to remain responsible for this.

But should wages rise surprisingly strongly in the months ahead, this could drive up inflation and compel the central bank to act. In January, however, month-on-month wage growth for average hourly earnings stood at only 0.3 percent according to labour ministry reports, and therefore remains behind the pace of the pre-crisis years.

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