“Like the Fed, we don’t see additional rate cuts as necessary at this point in the cycle. The 75-basis point rate cut in 2019 did the trick in steepening the yield curve and stimulating demand enough as to generate above-potential GDP growth for a third consecutive year. So much so that the U.S. output gap has turned positive and is finally generating inflation pressures. Recall that core CPI in 2019 averaged 2.2%, the highest in three years.” (National Bank of Canada, Monthly Monitor, January 2020,)

Worries about escalating inflation in the near term have virtually vanished from the financial markets as well as from the Federal Reserve’s recent policy discussions.

The latest US CPI report for December indicated that the headline CPI rose 2.3% in 2019 after increasing 1.9% in 2018. Last year’s CPI increase was its largest increase since 2011.

In fact, looking a bit closer at the data we see that consumer prices rose only slightly in December even as households paid more for health care. The CPI increased 0.2% last month after rising 0.3% in November and 0.4% in October.

Nonetheless, in the 12 months through December, the CPI rose 2.3%. That was the largest CPI increase since October 2018 and followed a 2.1% gain year-on-year in November.

In the 12 months through December, the core CPI also increased 2.3%, the largest gain since October 2018, after rising 2.3% in November. For all of 2019, the core CPI increased 2.3% after increasing 2.2% in 2018.

However, it is important to underline that CPI inflation slowed every month over the past three months, which supports the Federal Reserve’s desire to keep interest rates unchanged at least for a while.

The core CPI increased at a 2.3% year over year pace for the past three straight months, so it is clear that inflation isn't escalating.

Finally, the Fed’s preferred inflation index is the core PCE price, and the latest report showed core-PCE inflation pace at just 1.6% year over year.

That is, the most important inflation indicator is trending considerably below the Fed’s inflation target of 2% in a slowing economic environment.

In closing, a key conclusion arising from the latest data is that escalating inflation concerns should not trigger any immediate re-think of the Fed's interest rate policy position.

(Click on image to enlarge)