Real Wage Growth To Suffer From Increase In Energy Inflation

Energy Boosts Headline Inflation

January CPI report was more of the same type of reading we have been seeing this cycle. Inflation stayed low which means the Fed will keep rates low. Those who don’t follow this report closely will be surprised by the jump in energy inflation since oil prices cratered in January because of the coronavirus. 

It was all about the easy comp. If oil prices stay this low, energy inflation will stop boosting headline inflation in the spring. In the meantime, real wage growth calculations will plummet as the deflator rises. This factor hasn’t seemed to have hurt the consumer yet as consumer confidence was high in January.

Specifically, headline CPI was 0.1% which missed estimates and the last reading which were both 0.2%. While monthly CPI fell, yearly CPI was up from 2.3% to 2.5% which beat estimates for 2.4%. Yearly inflation was driven by energy prices because of its easy comp. If oil prices hadn’t cratered because of the coronavirus, headline inflation would have had a big spike. 

Energy inflation increased from 3.4% to 6.2%. Its comp went from -0.3% to -4.8% which means its 2-year stack fell from 3.1% to 1.4%. Energy inflation will be strong in February as well since its comp is -5%. In the spring, the comp gets harder, but then in the late summer and fall, it gets easy again.

Monthly core CPI was 0.2% which met estimates and was up from 0.1%. Yearly core inflation rose slightly but stayed at 2.3% which beat estimates for 2.2%. The chart below shows the Oxford Economics’ forecast for core CPI. It expects it to fall back to 2% in 2021. Core CPI is above the Fed’s 2% target, but core PCE inflation isn’t. In January, headline PCE inflation is expected to increase 0.2% to 1.8% and core PCE inflation is expected to rise 0.1% to 1.7%. 

Core PCE inflation is still below the Fed’s target which encourages it to cut rates. Let’s look at the details of the headline and core number. Headline CPI rose 19 basis points to 2.48% because of energy inflation. Its comp was 44 basis points easier, so its 2-year growth stack fell like energy. Core CPI rose 2 basis points to 2.27% while the comp was 6 basis points easier.

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