U.S. headline inflation eases slightly below market expectations in January

U.S. headline inflation came in flat sequentially in January, a bit weaker than market projections. Energy prices dropped for the third straight month, declining 3.1 percent sequential and 4.8 percent year-on-year. On a year-on-year basis, the headline inflation came in at a modest pace of 1.6 percent, a slowdown from 1.9 percent in December.

Excluding food and energy, core rate rose 0.2 percent in the month, rising for the fourth straight month. Similarly, on a year-on-year basis, the core rate came in at 2.2 percent, where it has sat for five of the past six months. Nevertheless, there seems to be a bit more price pressures coming through on core inflation recently. On a three-month annualized basis, core rate rose 2.7 percent, up from a low of 1.6 percent in October.

Core goods prices have been a significant driver of core inflation, rising 0.4 percent in the month. Core goods inflation has been in positive territory for four months. Most of January’s jump will likely reverse, as a 1.1 percent spike in apparel prices in January is likely to be at least partly reversed, noted TD Economics in a research report. Apparel prices have become quite volatile in the past year or so, but on net are up 0.1 percent year-on-year.

Meanwhile, core services inflation came in slightly more subdued in January, rising 0.2 percent sequentially. On a year-on-year basis, core services inflation came in at 2.8 percent, down from 2.9 percent in the prior month.

Continued strength in core goods prices gives assurance that core inflation seems unlikely to soften further. In the meantime, stable to weakening inflation for core services helps to alleviate concerns that there would be a break higher in inflation momentum.

“We expect the U.S. economy to remain resilient, and that the next Fed hike is likely to come in the latter half of this year”, added TD Economics.

At 15:00 GMT the FxWirePro's Hourly Strength Index of US Dollar was neutral at -19.86 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex