Main takeaway:
  • Core CPI inflation momentum rose to 2.4% (annualized).
  • Core services inflation increased from 2.5% yoy in June to 2.9% yoy in November. Core goods are down 0.6% yoy.
  • Sticky-price CPI (a sign of anchored expectations) is trending up.
  • Interestingly, core inflation is unabated despite the strong dollar.
  • Headline inflation will likely move up in the next couple of months due to base effect.

Fed's criteria for raising rates:

"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."

Given the expected hike tomorrow, the Fed is reasonably confident inflation will move back to 2%.
The focus, then, is likely to move toward the criteria the Fed will use to justify the second rate hike.

The chart below shows CPI in the last 6 years. Headline CPI was growing close to the underlying core CPI in a period where oil prices were roughly flat, butMarket forecasts, on the other hand, are betting on a secular stagnation type of story -- r* remains zero for the next two years and monetary policy stance remai
the gap opened from mid-2014 onwards with the sharp drop in oil prices. It is interesting also to note that the strong US dollar has barely dented the trend in core inflation.

The chart also shows that headline yoy inflation is likely to increase in the next couple -- unless the drop in oil prices is big enough to offset the drop in inflation observed in Nov/14-Jan/15 period. Even if headline inflation remains flat in the next couple of months, the yoy figure will increase from the current 0.4% to 1.4% in January.




Today's CPI print showed another increase in core inflation momentum (3-month annualized inflation). Core inflation momentum moved from 2.2% to 2.4%:

Average YoY measure of core inflation is currently at 2.1% -- the most recent low was 1.8% in May, but overall core inflation has been stable at around 2% since mid-2012.

But behind slight increase in YoY core inflation there's a growing divergence. Core goods are 0.6% lower than a year ago while core services are 2.9% higher.

Note how the pace of increase in core services prices increased in the last few months! It is very close to the average 3% inflation observed during 2002-2008 period.

Housing prices (rental and OER) represents 33% of CPI and is increasing at 3.2% yoy.



Sticky-Price CPI (a sign of anchored expectations) is trending up

The Atlanta Fed produces a breakdown between 'sticky' vs 'flexible' prices and they argue 'sticky' prices (which is a weighted basket of items that change prices relatively slowly) "appear to incorporate expectations about future inflation to a greater degree than flexible prices".




Overall prices, outside of energy group, do not seem to have bent to low oil prices and strong dollar.


Market-based inflation expectations and compensation