Overall, the economy looks to be in good shape as data related to manufacturing, employment, and sentiment seemingly point to continued expansion and increasing optimism – for both consumers and businesses. Despite a sub-optimal outlook for growth globally, the U.S. appears poised for continued growth into the new year.
The first estimate for December Headline CPI suggests the index declined by 0.4%, bringing the year-over-year change in prices to 0.8%, a result that was in line with expectations.
The Core CPI, which eliminates volatile food and energy prices, was unchanged in December, pulling the year-over-year change down to 1.6%. Economists were expecting a 0.1% increase for the month.
Two recent trends have put downward pressure on prices: the collapse in oil prices and the surging U.S. dollar.
Energy prices have fallen for six consecutive months, with the pace of the drop accelerating sharply since November. The benefit to consumers of that slide is readily apparent in the December numbers, as broad energy costs have dropped over 10% in the past year, while gasoline declined over 20% in 2014. Lower costs for those staples provides a bit more cushion in household budgets and flexibility to increase discretionary spending.
Similarly, the strengthening of the dollar lowers the cost of imported goods for U.S. buyers.
Lower oil prices are likely to keep a lid on headline inflation readings for now, although the path forward for oil prices is anything but clear. Supply is ample, and demand is expected to moderate in the coming year. However, if prices remain too low for too long, producers may be forced to cut unprofitable sources of production. Oil prices will find a floor, but will prices recover meaningfully in the near-term? Has oil entered a “new normal” range as a result of the combination of increased global production and slower demand growth? Those are questions for which there are no clear answers at present.
Adding it all up: the economy remains on a positive track despite the recent easing in inflation pressures. As of now, it appears that 2015 will likely be the year in which short-term rates will finally be moving higher, although the timing and magnitude remain open questions.