US Inflation continues to drift higher in December

Consumer prices were down slightly in December (-0.1% m/m), as falling energy prices continued to weigh on the headline. As expected, core CPI (excluding food and energy) was stronger, but still only up a tame 0.1% on the month.

Despite the monthly decline in the headline measure, favorable base effects led inflation to on a year-over-year basis edge up to 0.7% (from 0.4%). Core inflation also moved up, rising one tick to 2.1% in December.

Inflation in core services, which had been marching steadily higher since the spring, held at 2.9% year-over-year in December. A few categories that had been quite hot under the collar in recent months, like medical care services, took a bit of a breather in December.

The impact of a stronger U.S. dollar continued to be felt in core goods prices in December. Prices in the category fell 0.1% m/m, providing a partial offset to core services inflation. On a year-over-year basis core goods prices were 0.4% lower, as a stronger dollar helped to keep the price of many imported goods, such as clothing and computers, contained.

December's CPI is very much in line with expectation that inflation is set to drift steadily higher in the coming quarters. This dynamic will be related to the waning base year effects whereby previously dampening influence of energy prices declines and a stronger U.S. dollar dissipates over the course of 2016.

However, the upward trend in inflation is expected to remain relatively contained, enabling the U.S. Federal Reserve to keep the pace of monetary tightening very modest.

"We expect the Fed to hike its funds rate in three 25 basis point steps in 2016, ending the year at 1.25%, but downside risks to this call may yet materialize given the recent global volatility", says TD Economics.