Main takeaways:
  • Headline and core inflation both ticked up in December, but were a bit below market consensus.
  • Sticky-price CPI (a sign of anchored expectations) ticked down but is still at 2.5%.
  • Inflation momentum softened from 2.4% to 1.9%.
  • If oil prices continue to move lower, inflation (headline and core) will likely soften in the near term, mimicking the path observed in late 2014 / early 2015.


Headline and core inflation ticked up...
...but inflation momentum softened back to 2%


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, but 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, so far, barely dented the trend in core inflation.

Headline and core inflation could soften again reflecting lower oil prices, repeating what happened in late 2014 early 2015

But behind slight increase in YoY core inflation there's a growing divergence. Core goods are 0.4% lower than a year ago while core services are 2.9% higher.

Sticky-Price CPI (a sign of anchored expectations) is high
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".


Market-based inflation expectations and compensation: this is key for the FOMC!