November US CPI shows continued tug-of-war between core services and core goods

In the November US CPI inflation report, headline inflation was flat on the month and up 0.5% y/y and core inflation was up 0.2% m/m and 2.0% y/y. Both series were in line with  forecast. The NSA index level at 237.336 was a touch stronger than 237.2 forecast, driven by a modest upside surprise to core inflation (0.179% m/m rounded to three decimals) versus our expectation (0.15% m/m).

The details of the report continue to tell the story of weak energy prices (-1.3% m/m, -14.8% y/y) holding down headline inflation and solid core services inflation (0.3% m/m and 2.9% y/y) offset by weak core goods inflation (-0.2% m/m and -0.6% y/y). Within core services, shelter posted a solid 0.2% increase, with rents and OER both up 0.2% on the month.

Elsewhere, medical care services was up 0.4% and the category has posted three straight months of solid increases. Education and communication services (0.3%) and transportation (0.6%) also provided upward momentum in services inflation. However, core goods inflation posted another month of decline, with apparel (-0.3%), used cars and trucks (-0.1%), and other core goods (-0.4%) more than offsetting a modest rise in new vehicle prices (0.1%) and medical care commodities (0.3%).

"We expect further pass-through from dollar appreciation to weigh on core goods prices through mid-2016. In the near term we expect both core and headline inflation will firm as the base effects of past energy price declines and dollar appreciation begin to fade. However, renewed strength in the dollar since mid-year, particularly against EM currencies, and an acceleration in the rate of decline in China PPI lead us to project a modest reversal in core inflation in 2016. Once this pass-through begins to fade, we then look for modest wage inflation to support non-shelter services inflation and a return of overall inflation to the Fed's target in 2017", says Barclays.