December’s CPI Research Notes

by Jim Baird on January 16, 2013

Inflation eases modestly on falling energy costs

CPI remained unchanged in December, sufficient to lower the headline number for 2012 to just 1.7%. Inflationary pressures subsided meaningfully during the year – well below the 3.0% rate of 2011.

Core CPI, which excludes volatile food and energy prices, edged higher by 0.1% in December to end the year at 1.9%.

Falling energy prices continue to put downward pressure on headline CPI.  In recent months, that development – coupled with a recent uptick in the pace of income growth – has proven to be supportive of consumer spending.

Some of that benefit has been offset by rising food prices, partially a result of the negative impact of last summer’s drought on food stocks.

In the near-term, the recent hike in payroll taxes appears likely to weigh a bit on household spending as take home pay is reduced accordingly.  Some of the impact will undoubtedly be offset by reduced savings, but the bite taken out of discretionary income will be a drag on spending to some degree.

Ultimately, the potential for deflation and the need to foster a better pace of economic growth remain higher on the list of worries for the Fed than inflation or the potential long-term ramifications of its exceptionally easy monetary policy.  That may be a problem down the road, but that is a battle that the Fed is willing to fight another day.

To see news coverage featuring Jim’s comments, please visit the following sites:

U.S. Industrial Production Highest Since 2008; Prices Flat (Dow Jones Newswires)

Inflation was tame in 2012 (CNNMoney)

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