The U.S. consumer price index increased in December as “shelter” costs and vehicle prices of both new and used vehicles increased. Consumer price index (CPI) figures released by the Bureau of Labor Statistics indicated consumer prices rose by 0.1% in December, in line with market expectations of 0.1% but lower than November’s comparable figure of 0.4%. On a 12-month basis the consumer inflation rate eased back from November’s reading of 2.2% to 2.1%.
U.S. financial markets reacted by sending bond yields higher but the USD lower. 2 year bond yields increased by 4bps to 2.00% but yields at the long end were less affected and 10 year yields increased by just 1bp to 2.55%. The U.S. dollar was weaker against all other major currencies.
Core prices, or prices excluding food and energy, rose by 0.3% over the month and 1.8% for the year. Both these monthly and annual price changes were higher than November’s comparable figures of 0.1% and 1.7%. ANZ senior economist Daniel Gradwell said there was not yet a consensus as the path of U.S. inflation in 2018 but he was leaning towards the view it was approaching the Fed’s target. “Friday’s inflation data will raise confidence that it will gradually return to target, which would argue in favour of further yield curve steepening. Tighter labour markets, anecdotal evidence of growing wage pressures, above-trend growth, fiscal expansion and still negative real policy rates all point to intensifying US inflation pressures.”