US Inflation Slows to a 2-year Low as December Retail Sales Fall

Energy prices post a major drag on consumer prices

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Consumer prices in the United States stayed flat at the start of the year marking a third consecutive month. The flat reading comes amid energy prices holding inflation down.

Consumer price index which means the number of prices paid for goods and services remained unchanged in January, compared to the month before.

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Headline CPI

Data from the Labor Department showed that headline CPI remained at 0%. However, the core inflation rate which excludes the volatile food and energy prices increased 0.2% on the month from December 2018.

Economists forecasted that headline inflation would rise 0.1% while core inflation should rise by 0.2%.

On an annualized basis, inflation advanced to a slower pace of 1.6% in January since the start of last year. This was the smallest year over year increase since mid-2017.

Core Inflation

The core inflation rate, on the other hand, remained firm, rising 2.2% on the year for the third consecutive month. Core inflation readings indicated that inflation pressures in the economy remained steady.

Energy prices were to blame for the decline in inflation as they fell 3.1% on the month in January. This offset the price growth seen in other categories. The decline in energy prices managed to drag the overall inflation lower. Prices across all sectors including gasoline and electricity fell from December.

Food prices rose by 0.2% including prices of other services and goods such as rent, apparel, and medical care.

Wage Growth

Wage growth increased at a slower pace. When adjusted for the latest inflation readings, the average hourly earnings rose just by 0.2% on the month in January. This is slower than the 0.4% increase in December 2018.

The strengthening U.S. dollar seems to have impacted the weaker inflation growth. The U.S. dollar index had been rising over 7% in 2018, making it cheaper for the U.S. to import foreign goods.

Recent data showed that expectations for future price growth remained steady amid somewhat muted wage growth. Businesses found it hard to raise prices as a result.

The FOMC

The data comes as the Fed chair Jerome Powell and the FOMC left interest rates unchanged. Most recently, the Fed said that the risk of inflation overshooting the target had diminished despite a strong labor market data and steady economic growth.

The U.S. unemployment rate hovers near multi-decade lows while the economy grows at a pace that seems to be sustainable.

Officials have noted that one of the reasons for holding interest rates steady was partly due to the muted inflation. The Federal Reserve hiked rates four times last year bringing the short-term interest rates to 2.25% – 2.5%. Inflation has held steady near the Fed’s 2.0% target.

Retail sales disappoint

The U.S. monthly retail sales report was disappointing as data came out weaker than expected for the month of January.

Official data showed that retail sales declined on a seasonally adjusted basis of 1.2% in December from the month before. This was the largest decline in retail sales since 2009. The data was also well below forecasts.

Economists had forecast an increase of 0.1% in retail sales during the period.

The retail sales report covered the month of December and was delayed due to the partial government shutdown. The disappointing figures sparked concerns about the economic slowdown which has been worrying investors globally.

Core retail sales were worse, plummeting 1.8% during the same period. Previous month’s data was revised to show a flat reading while the headline retail sales report for November was revised down to 0.1%.

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