CPI: Core inflation modest but trend higher

Bottom Line: Headline consumer inflation declined in December as energy prices continued to fall. Consumer prices are now just 0.7% above their year ago level. Meanwhile, core consumer prices rose modestly and are 2.1% above their year ago level. "Owners' Equivalent Rent" (a major component of CPI that is an estimate of the cost of shelter) rose by 0.2%, 3.2% year-over-year, and has moved up 50 bps over the past year. Overall inflationary pressures at the consumer level still remain modest but the trend in core is rising now compared to year-ago levels. The CPI FELL by 0.1% in December, compared with market expectations for no change of 0.0%. Food prices declined by 0.2% while energy prices tumbled by 2.4%.Prices for gasoline plunged by 3.9% while prices for fuel oil declined by 4.0%, prices for electricity slipped by 0.4%, and prices for natural gas fell by 2.3%. Energy prices are now 12.7% BELOW their year ago level. Overall consumer prices are now 0.7% ABOVE their year ago level; in December 2014, consumer prices were 0.7% ABOVE their year ago level. Year-over-year consumer inflation peaked in September 2011 at 3.9% and then slowed and bottomed at 0.9% in October 2013 and then was rising modestly until May 2014, but since then it has been declining. The Core CPI ROSE by 0.1%, compared with market expectations for an increase of 0.2%. Prices for commodities excluding food and energy commodities fell by 0.1%. Gains in used cars & trucks (+0.1%), and shelter and owner's equivalent rent (+0.2%) were offset by declines in apparel (-0.2%), medical care (-0.1%), and new vehicles (-0.1%), Core consumer prices are now 2.1% ABOVE their year ago level; in December 2014, consumer prices were 1.6% ABOVE their year ago level. Year-over-year core consumer inflation bottomed at 0.6% in October 2010, then rose through May 2012 to a peak of 2.3%.