Matching 2013’s modest monthly average, headline CPI increased 0.1 percent in January, bringing the yearover- year pace up to 1.6 percent. Consumer inflation remains tame, but should trend higher this year.

Energy Accounts for Most of January’s Headline Gain

Marking the third and final January inflation report released by the U.S. Department of Labor, the headline Consumer Price Index (CPI) registered a modest monthly rise of 0.1 percent – in line with consensus expectations. As expected, energy prices helped support the headline index last month. Following a 1.6 percent gain in December, prices for total energy goods rose 0.6 percent as solid gains in electricity, natural gas, and fuel oil offset a 1.0 percent decline in gasoline prices. Nationwide, retail gasoline prices have been well behaved, averaging $3.39 in January – down from the 2013 average of $3.58 per gallon. While signs of a pick-up are present in February, energy prices remain favorable to consumer purchasing power at the start of the year, with the year-over-year pace of energy price increases at only 2.1 percent.

Matching its tame six-month moving average, consumer food prices edged up 0.1 percent in January. Firmness in prices was the key theme as the food at home index was up 0.1 percent and food away from home index remained unchanged. Food price inflation has also been manageable for the U.S. consumer, up a moderate 1.1 percent over the past year.

Shelter Costs Support Modest Core Inflation

Excluding food and energy, consumer price changes were tame, with the core CPI increasing 0.1 percent. Once again, shelter costs remain a primary support to the steady monthly gains in core CPI. Owners’ equivalent rent rose 0.2 percent in January, with complimentary gains in rent of primary residence and lodging away from home. Further support to core CPI came from gains in tobacco, recreation and medical care. Tempering January’s overall core CPI rise were declines in airfares and motor vehicles.

Fed Concerned, but Still Believes Inflation Will Pick-Up

Reflecting recent comments from Fed Chair Yellen’s first policy testimony before Congress and the minutes from the January FOMC meeting, low inflation remains a factor as Fed officials weigh on the proper path for U.S. monetary policy. While concerned that inflation has remained below target for nearly two years, Fed officials still “anticipate that, with longer-run inflation expectations stable, transitory factors that had been damping inflation likely to recede, and economic activity picking up, inflation would move back toward the Committee’s 2 percent objective over the medium run.”

We are in agreement with the Fed’s inflation position as our outlook projects rising year-over-year rates over the near-term forecast horizon. With demand likely to accelerate, furthering a reduction in economic slack, we expect headline CPI to gradually accelerate to 2.0 percent by year’s end. We expect a similar performance from core CPI to 2.1 percent.

Wells Fargo