A shopper makes a purchase at the JC Penney department store in North Riverside, Illinois, the US. Picture: REUTERS
A shopper makes a purchase at the JC Penney department store in North Riverside, Illinois, the US. Picture: REUTERS

Washington  — US consumer prices rose slightly in December even as households paid more for healthcare, and monthly underlying inflation slowed, supporting the Federal Reserve’s desire to keep interest rates unchanged at least through this year.

The weak inflation report from the labor department on Tuesday came on the heels of data last week showing a moderation in job growth in December. Economists said these developments were flagging a  slowdown in domestic demand. Though the economy appears to have maintained a steady pace of growth in the fourth quarter, it was probably supported by falling imports.

“This is giving rise to the fear that maybe economic demand is showing early signs of hitting a new soft patch for growth that will carry into the first quarter of 2020,” said Chris Rupkey, chief economist at MUFG in New York.

“The Federal Reserve is on the sidelines this year, but that could swiftly change if overall economic demand weakens and inflation shows little sign of returning to target.”

The department said its consumer price index (CPI)  increased 0.2% in December after climbing 0.3% in November. The monthly increase in the CPI has been slowing since jumping 0.4% in October. In the 12 months through December, the CPI rose 2.3%.

That was the largest increase since October 2018 and followed a 2.1% gain year-on-year in November.

The CPI accelerated 2.3% in 2019, the largest rise since 2011, after increasing 1.9% in 2018. Economists polled by Reuters had forecast the CPI would rise 0.3% in December and advance 2.3% on a year-on-year basis.

Excluding the volatile food and energy components, the CPI edged up 0.1% after climbing 0.2% in November. The so-called core CPI was up by an unrounded 0.1133% in December compared with 0.2298% in November.

Underlying inflation in December was held back by declines in the costs of used cars and trucks, airline tickets and household furnishing and operations, which offset increases in the prices of healthcare, apparel, new motor vehicles, recreation and motor vehicle insurance.

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

The dollar was little changed against a basket of currencies as investors awaited the signing on Wednesday of a preliminary trade deal between the United States and China, a first step towards diffusing an 18-month trade war. US Treasury prices rose. Stocks on Wall Street were mixed.

Healthcare costs 

The Fed tracks the core personal consumption expenditures (PCE) price index for its 2.0% inflation target. The core PCE price index rose 1.6% on a year-on-year basis in November. It undershot its target in the first 11 months of 2019. PCE price data for December will be published later in January.

The US central bank last month left interest rates steady and signalled monetary policy could remain on hold in 2020 after it reduced borrowing costs three times in 2019.

Minutes of the Fed’s December 10-11 meeting published early in January showed policymakers generally expected inflation would eventually hit the central bank’s target as the economy continued to expand and resource utilisation remained high.

There were, however, concerns among some officials “that global or technology-related factors were exerting downward pressure on inflation that could be difficult to overcome”.

Moderate inflation was underscored by the employment report last Friday, showing the increase in annual wage growth retreating below 3% in December, despite the unemployment rate holding at near a 50-year low of 3.5% and a broader measure of labor market slack dropping to a record 6.7%.

Weak inflation offered no boost to consumers’ purchasing power, with average weekly earnings slipping 0.1% last month after edging up 0.1% in November. This could hurt consumer spending, which is already slowing.

“It is hard for the average household to keep up the spending we have seen if their spending power is going nowhere,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

In December, fuel prices advanced 2.8% after rising 1.1% in November. Food prices gained 0.2% after edging up 0.1% in November. Food consumed at home ticked up 0.1%.

Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, increased 0.2% for a third straight month.

Healthcare costs jumped 0.6% in December after rising 0.3% in the prior month. They were boosted by a 2.1% acceleration in prices for prescription medication. Consumers also paid more for hospital services and doctor visits.

Healthcare costs surged 4.6% in 2019, the largest gain since 2007 and up compared to 2% in 2018.

“It may be too early to conclude this, but it is beginning to look like the current laissez-faire approach to healthcare is allowing providers to ramp up prices,” said Naroff.

Airline fares fell 1.6%, declining for a third straight month.

Reuters

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