Retail inflation at 17-month high in Dec '17

Gladys Abbott
January 13, 2018

The reports probably will keep the Federal Reserve on course to increase interest rates in March and raise the prospects of a more aggressive monetary policy tightening this year. Some central bank committee members have said that interest rates should be put on hold until inflation picks up.

The core inflation reading, which consumer prices excluding food and energy, rose 0.3% in December from November but rose 1.8% from the December 2016 reading.

Rising consumer prices provide further support for central bank policymakers' median expectation of three increases this year in the Fed's benchmark interest rate, which now is at a range of between 1.25 percent and 1.5 percent.

While the price rise may trouble the common man, there is reason to cheer on the macroeconomic front as November IIP (Index of Industrial Production), or factory growth shot up to an impressive 8.4 per cent from a lowly 2.2 per cent in the month of October.

Most of the pressure here in December's inflation was tied to housing and medical costs.

"Although the US CPI isn't the inflation measure that the Fed targets, the market arguably pays more attention to the CPI than to the Fed's preferred gauge, the personal consumption expenditure (PCE) deflator".

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The food index rose 0.2%, while prices for food at home increased 0.1%.

The dollar fell to a session low against a basket of currencies after the data. The yield on the two-year Treasury note surpassed 2 percent for the first time since the peak of the financial crisis in late 2008 after the inflation report was released Friday by the Labor Department. In the month of November 2017, IIP grew by 8.4% from 2.2% in the previous month. Owners' equivalent rent of primary residence climbed 0.3 percent after gaining 0.2 percent in November. The cost of both hospital and doctor visits increased 0.3 per cent.

While vegetable prices likely dropped moderately last month, a pay revision in July past year for government employees probably pushed up demand and inflation. The cost of motor vehicle insurance increased 0.6 per cent. Apparel prices, however, fell 0.5 percent. The December decline was led by a drop in the price of gasoline. That lowered the year-on-year increase in the CPI to 2.1% from 2.2% in November.

In a separate report on Friday, the Commerce Department said retail sales rose 0.4 percent last month. The cost of healthcare services increased 0.2 percent last month after being unchanged in November. Sales at auto dealerships rose 0.2 per cent.

A separate Commerce Department report on Friday showed USA retail sales rose in December and November's gain was revised upward, indicating a robust holiday-shopping season. The so-called core PPI increased 0.4 percent in November. Manufacturing grew 10.2 per cent against 2.5 per cent in October.

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