US core inflation picks up, adding support for Fed tightening

US consumer prices were flat in January but core prices rose 0.3 percent in a potential pickup in inflationary pressures, US data showed Friday.

Analysts said the numbers, stronger than expected, added support to the Federal Reserve's track for slowly tightening monetary policy this year, even as other major central banks cut rates to stimulate growth.

Falling energy prices again held down the overall consumer price index, and food prices were unchanged. But the CPI had been expected to slip by 0.1 percent, rather than hold up unchanged.

Falling energy prices again held down the overall US consumer price index, and food prices were unchanged ©J Pat Carter (Getty/AFP/File)

For the more indicative core CPI, which strips out energy and food because they fluctuate more, analysts had forecast a significantly smaller 0.1 percent rise.

But costs rose strongly in the month for clothing, housing, auto, transport and health care.

Costs for shelter, up 0.3 percent, and medical care, up 0.5 percent, were the largest contributors to the core CPI gain.

Over 12 months, core prices were up 2.2 percent, in the range of the Federal Reserve's target 2.0 percent for tightening monetary policy.

While the Fed follows more closely a differently weighted index of prices -- the PCE price index -- which remains weaker, analysts said the CPI numbers were nevertheless indicative of the direction of inflation.

Economists had expected overall prices to fall in January due to sinking energy costs and the push downward on the cost of imported goods due to the strong dollar.

Instead, goods and services crucial to consumers all rose strongly enough to offset those deflationary forces.

With the US unemployment rate now at eight-year lows at 4.9 percent, analysts generally said the fresh data supported monetary policy firming.

"If unemployment keeps falling, the Fed will have to keep tightening," said Jim O'Sullivan, chief US economist at High Frequency Economics.

- March hike back in play? -

But analysts were split on whether the inflation numbers justified an interest rate hike as soon as the Fed's next meeting on March 15-16.

The Fed had indicated in December -- when it raised its benchmark federal funds rate range by a quarter point to 0.25-0.50 percent -- that it expected four more increases over the coming year.

But in recent weeks Fed policymakers, including Chair Janet Yellen, have exhibited clear worries over the risks to growth from global turmoil and tightening financial conditions at home.

Some analysts took that as increasing the possibility that the Fed would even backtrack with a rate cut, after the central banks of Japan and the eurozone took rates negative in extraordinary steps to fight off deflation.

But Ian Shepherdson of Pantheon Macroeconomics said the January CPI report was more evidence that core inflation is "taking off." He pointed to the 3.2 percent year-on-year rise in rents and 3.3 percent gain in medical care services.

"It's always dangerous to read too much into data for a single month, but we now have a whole year's worth of rising core CPI inflation," he said.

Markets read it as such, too: the US dollar pushed higher to $1.1103 per euro, and the yield on the five year US Treasury bond surged to 1.26 percent from 1.20 percent.

Jason Schenker of Prestige Economics said the new CPI report "should raise Fed eyebrows regarding core inflation risks."

"Moreover, with the unemployment rate at 4.9 percent, the odds of a Fed rate hike in March have increased," he added.

Others said the Fed would wait to see more data -- the next CPI report will be issued only during the Fed's March meeting.

Gus Faucher, an economist at PNC Bank, set his eyes on June. The Fed "is likely to hold off in the near term, to see whether financial markets settle down from the volatility of early 2016," he said.

US consumer prices were flat in January but core prices rose 0.3 percent in a potential pickup in inflationary pressures ©Joe Raedle (Getty/AFP)