US: Greater upward pressure on core inflation going forward – RBC CM

Data released today showed that the annual CPI rate dropped to 1.6% while the core rate stood at 2.2%. Paul Ferley, Assistant Chief Economist at RBC Capital Markets, points out CPI remained unchanged in January which represented the third consecutive month of steady prices. They forecast greater upward pressure on core inflation going forward

Key Quotes:  

“January consumer prices held steady matching unchanged prices in December. Both months saw downward pressure from falling gasoline prices with this component in January dropping 5.5% after December’s decline of 5.8%.”

“The overall CPI year-over-year rate dropped to 1.6% from December’s 1.9% while the annual increase in core prices held steady at 2.2%.”

“The increase is still slightly above the Fed’s inflation objective of 2.0%. As well, the upward drift in wage inflation remains intact with the most recent increase in January at 3.2% implying an ongoing inflation risk going forward.”

“Our forecast assumes that GDP growth will remain sufficiently strong to keep the U.S. economy in excess demand and put greater upward pressure on core inflation going forward. This is expected to result in the Fed eventually raising fed funds a further 50 basis points sending the upper end of the fed funds range to 3.0% by the end of 2019.”