Headline CPI is currently held down by sliding oil prices, while domestic inflation pressures are greater than suggested by the still tame core rate. Core service prices are up 2.5% y/y, reflecting increasing rent inflation as well as increasing wage pressures. For the same reasons we still expect core CPI inflation to move slowly higher in 2015 and 2016.
Headline CPI was slightly weaker than expected in November, with a 0.3% decline over the month. The consensus forecast was a 0.1% decline. A 0.1% rise in the core index was in line with the consensus estimate.
Once again the headline CPI was held down by falling energy prices (-3.8% after -1.9% in October), which were enough to offset higher food (0.2% after +0.1%) and core prices (0.1% after 0.2%).
Within the core CPI, increases in shelter costs (+0.3% after +0.2%), airline fares (+1.4% after +2.4%) and medical care prices (0.4% after +0.2%) outweighed declines in clothing (-1.1% after -0.2%), household furnishing (-0.2% after 0.4%), used car prices (-1.2% after -0.9%) and education (-0.1% after -0.2%). The second straight rise in airline fares is somewhat surprising considering the plunge in oil prices.
Within shelter costs, primary rents rose 0.3% (after +0.2), while owners’ equivalent rents were up 0.2% (after +0.2%).
Over the past 12 months, the headline CPI is up 1.3%, down from 1.7% in October, while core CPI is up 1.7% in November after 1.8% in October. The consensus forecasts were 1.4% and 1.8%, respectively. Our estimates were 1.3% and 1.8%.
The current still core CPI inflation readings are the result of significantly diverging trends in prices for goods and services. Thus, core goods prices are down 0.5% y/y, held down by a stronger USD constraining import prices. Core service prices, on the other hand, are up 2.5% y/y, reflecting increasing rent inflation as well as increasing wage pressures.
Because service prices account for a full 74% of overall core CPI inflation, it will be difficult for the core rate to move much lower, despite the drop in energy prices.
As a result, we still expect core CPI inflation to move slowly higher in 2015 and 2016 as evidence of tighter labour and rental markets points to stronger wage increases and rents inflation. Rising core inflation will make it difficult for the Fed not to raise rates in 2015, and we continue to believe that evidence of higher underlying inflation pressures will cause markets to price in more tightening from the Fed.
Nordea