Falling oil prices and dollar appreciation to weigh on US inflation throughout 2016

The headline inflation for December in the US decelerated 0.1% m/m and increased 0.7% y/y, lower than Barclays' and consensus forecast. Core inflation in the US accelerated 0.1% m/m and 2.1% y/y, on par with Barclays' expectations. The NSA index level was at 236.525, slightly weaker than Barclays projection of 236.7. The weaker headline inflation and the NSA data are mainly due to the expected fall in the price of food consumed at home. The fall in the series is expected to be because of the recent strengthening of dollar. Energy prices in the US continue to decline sharply by 2.4% m/m and 12.6% y/y.

"Given the ongoing declines in oil prices, we expect considerable further near-term weakness in energy inflation, which will hold down headline inflation on a y/y basis through the end of 2016", says Barclays. 

Core goods inflation declined 0.1% m/m and 0.4% y/y, on par with expectations, while the core services inflation weakened 0.2% m/m and 2.9% y/y in December. Under core services, shelter recorded a rise of 0.2%, and rents and OER up 0.2% m/m. Meanwhile, medical care services accelerated 0.1%, slowing after increasing rapidly for three consecutive months. Under core goods, medical care commodities declined 0.1%, apparel prices dropped 0.2%, new vehicle prices fell 0.1% and used cars and trucks increased slightly.

"Looking ahead, we expect further pass-through from dollar appreciation and the ongoing decline in oil and commodity prices to weigh on core goods prices throughout 2016. However, we expect some modest firming in both core and headline y/y rates of inflation as the base effects of past energy price declines and dollar appreciation fades", says Barclays.

A moderate reverse in core inflation is expected in 2016 due to the renewed appreciation of US dollar since mid-year, mainly against the emerging market currencies, a sharp fall in commodity prices and the increase in the pace of decline in China PPI. Moderate wage inflation and falling unemployment rate is expected once the pass-through starts to fade to help non-shelter services inflation and return of overall inflation to the target rate of US Fed in 2017.