U.S. inflation reaches above 2 pct in December, energy prices to mainly drive inflation in 2017

The U.S. inflation reached a two-and-a-half year high in December. The consumer price index rose more than 2 percent for the first time since 2014 as consumers paid more for gasoline and shelter. The year-on-year rate came in at 2.1 percent, acceleration from 1.7 percent in November, as prices increased 0.3 percent on the month, in line with expectations.

Gasoline price was up 3 percent in the month as the price of crude oil rose more than USD 50/bbl. Energy costs are not keeping inflation low, with the gasoline price currently 9 percent above the year ago levels and natural gas for home heating 8 percent higher, noted TD Economics. Consumers in the U.S. might be paying more for energy; however, they are taking a break at the grocery stores. Stronger U.S. dollar has cut the cost of several foodstuffs, and food prices have remained flat or lower since last May.

Core inflation also accelerated a bit in December. Core prices rose 0.2 percent, as expected. Shelter was a significant part of the story, as prices rose 0.3 percent higher in December. The cost of renting and owning a home has been increasing gradually in the past couple of years. Shelter inflation rose 3.6 percent year-on-year, surpassing core services inflation.

Still, core goods prices continued to be weak in December, partially because of the lofty greenback. Significant consumer goods, like apparel, have seen prices decline for two consecutive months. With inflation surpassing 2 percent for the first time since the collapse in oil price, December’s inflation report would possibly garner some headlines.

But, inflation has been anticipated to accelerate as the downward pressure from energy prices moves into the rear view, with the report quite consistent with expectations, stated TD Economics. Higher energy prices are likely to mainly drive the headline inflation to 2.5 percent to 3 percent range in this year, added TD Economics.

“We remain confident that given the pick-up in wage pressures in the U.S. economy, core inflation pressures are beginning to bubble up, and that the Fed will gradually take rates higher over the next two years”, said TD Economics.

At 05:00 GMT the FxWirePro's Hourly Strength Index of US Dollar was neutral at -42.2345. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex