The U.S CPI (seasonally adjusted) annualized data for January came slightly above the previous one at 1,4% from 1,3% in December. The increase in inflation was mainly driven by the recent recovery in energy prices especially oil and gasoline as well as commodity prices.

U.S CPI Year Over Year

However, some major headwinds have stopped the headline CPI from rising further in January:

As we see in the chart above, the base effect factor has reached its peak in January which made it hard to perform much above the 2.5% of the previous year. As we look further, by February we begin a new cycle of lower base effect that should boost inflation higher in the first and second quarter of 2021, then to end the boosting base effect cycle and start a new one by June where things become difficult again.

The second major element negatively affecting inflation is the demand side. Many consumer sentiment surveys as well as labor market data are still indicating weaker demand which keeps prices at a low level. However, vaccine hope and the $1.9 trillion stimulus package are driving much optimism to markets and expected to have a positive impact on demand and prices by the second quarter of this year.
Generally, we still expect a continuous rise in inflation driven mainly by the rise in oil and commodity prices as well as the previous year supportive base effect.

On the other side, the annualized Core inflation down ticked from 1.6% to 1.4%, as the volatile items are taken away from the index, the core CPI doesn’t reflect the rise in energy prices.

U.S Core CPI Year Over Year

Moreover, it was much affected by the previous year's base effect that becomes much tougher in February before it starts easing, putting the core CPI at a lagging position by about a month or two after the headline index.