US core PCE likely to be near current levels for most of 2016

In US, the inflation was flat, consistent with the consensus expectations. At the core PCE level, the prices increased by 0.1% mom and 1.3% yoy. In the November PCE report, goods prices dropped 2.6% y/y with both durables at -1.7% y/y and nondurables at -3.1% y/y showing weakness. 

Services inflation at 1.9% was unchanged when compared to previous months, but not sufficient to counter balance further weakness in core goods. The pace of decline in the goods prices was slowed, the pass through effects of past dollar appreciation in 2014 are starting to fade.

The renewed dollar pass through effects based on the rise in USD since mid 2015 and out forecast also assumes the sharp drops in Chinese producer prices continue to weigh on goods prices.

"Hence, we expect y/y rates of core PCE to be near current levels for most of 2016, which should reinforce expectations of a gradual Fed tightening cycle", says Barclays in a research note.