US inflation held back by slumping energy prices

Consumer prices fell by 0.1% m/m in December, principally thanks to a 4.0% m/m decline in gasoline prices and, with crude oil prices now below $30 a barrel, one can expect an even bigger decline in retail gasoline and overall consumer prices in January. Despite the decline in prices last month, base effects pushed the headline CPI inflation rate up to 0.7%, from 0.5%. But the lower level of commodity prices means that headline inflation will now spend most of this year at around 1% and, barring an unexpectedly big recovery in energy prices, won't rebound to 2% until early 2017.

There were some signs of renewed weakness in domestic prices pressures last month too. Clothing prices fell by 0.2% m/m, which could be weather-related or due to the stronger dollar, while motor vehicle prices fell by 0.1% m/m. line fares fell by 1.1%, as the renewed decline in energy prices fed through. The gains in housing and medical care were also a little more modest than in the preceding few months.

"The renewed turmoil in financial markets and the increasing probability of a sharp slowdown in fourth-quarter GDP growth had already dented expectations of a second rate hike from the Fed in March and December's CPI figures will probably lower those expectations even further. With two months still to go, we wouldn't rule out a hike at that meeting, but it is becoming a very close call", says Capital Economics.