Another Tame CPI Report

This morning, the government said that consumer prices fell 0.1% in December. That’s the first drop in nine months. Over the course of 2018, inflation rose by 1.9%.

The “core rate,” which excludes food and energy, rose by 0.2% last month. Over all of 2018, core inflation rose by 2.2%. The data confirms what the market has been saying — inflation is not a problem. Gasoline prices fell 7.5% last month after dropping 4.2% in November.

December’s inflation readings were in line with economists’ expectations. The Federal Reserve, which has a 2 percent inflation target, tracks a different measure, the core personal consumption expenditures (PCE) price index, for monetary policy.

The core PCE increased 1.9 percent year-on-year in November after rising 1.8 percent in October. It hit 2 percent in March for the first time since April 2012.

A sharp decline in oil prices amid an oversupply and slowing global economic growth is keeping overall inflation in check. Lower oil prices are also filtering through to core inflation via cheaper airline tickets.

While the Fed has forecast two rate hikes this year, moderate inflation pressures likely support recent statements by several policymakers, including Chairman Jerome Powell, for caution about raising interest rates this year.

Here’s a look at the real Fed funds rate, based off core inflation.