US Economy and Rates Update January 14, 2020
US Economics: Accounting for Downside Surprises
Core CPI surprised somewhat to the downside and rose 0.1%M (0.113%M unrounded) in December, keeping the year-over-year rate at 2.3%Y. However, core unrounded printed at 2.259%, i.e., not far from rounding down to 2.2%Y. With food prices up 0.2%M and energy up 1.4%M, headline CPI moved up 0.2%M (0.219%M unrounded), which lifted the year-over-year rate from 2.1%Y to 2.3%Y. The underlying details were mixed. Core services decelerated from +0.27%M in November to +0.18%M in December, matching the monthly reading last seen in May 2019. Core goods moved down on the month, coming in at -0.04%M.
That said, implications for the Fed from the December CPI and projected PCE inflation prints should be minimal. Economists continue to see the Fed on hold through next year. On their current year-ahead forecasts for inflation, the bar for hiking rates will not be met prior to the third quarter of 2021. At the same time, the FOMC plans to revisit the inflation framework in the context of the general framework review, and officials are pointing to a likely completion around the middle of 2020. This would put it on track to release the statement at the June FOMC meeting and may include a change to the inflation framework.