January Inflation Shows a Scant 0.2% Rise, and the Core Rate Fell

Inflation hawks got little to feed on in January, as consumer prices in the month rose just 0.2% on moderating housing costs, the U.S. Labor Department announced Friday. Further, the core rate -- which excludes the often-volatile food and energy component -- fell 0.1% in January and is up just 1.6% in the past 12 months.That annual rate is well within the U.S. Federal Reserve's "comfort zone" for inflation. In addition, the January core decline was the first monthly drop in that measure since 1982.

All told, top-line inflation (including food and energy prices) has increased just 2.6% in the past year. A Bloomberg News economists survey had expected consumer prices to increase 0.3% in January after an 0.1% rise in December, and the core rate to rise 0.1% in January after a similar rise in December. Consumer prices rose 0.4% in November, and the core rate was unchanged in that month.

In January, housing costs dropped 0.3%, apparel fell 0.1%, electricity costs declined 1.1% and new vehicle prices were down 0.5%. On the other side, food prices rose 0.2%, gasoline jumped 4.4%, fuel oil rocketed 6.1% higher and medical care prices rose 0.7%.

Little Upward Pressure on Prices

Most economists don't expect inflation to rise significantly in the months ahead. They say the recession that has cut factory production and resulted in more than 8.4 million layoffs has led to excess capacity in the commercial sector and slack in the labor force that will limit price/wage increases. And until wages start showing signs of an upward push, the Fed is unlikely to raise is benchmark funds rate.

Also working against inflation is the reluctance by foreign manufacturers that export goods to the U.S. to raise prices amid intense competition. Many are holding the line on prices despite cost increases for fear of being priced out of the lucrative U.S. market.

For investors, the bottom line regarding the January report is that inflation remains under control at the retail level. That's indicated by the core rate's slim 1.6% rise in the past year. Minus the volatile energy and food components, prices have been basically flat over the past 12 months.

Even though on Thursday the Fed raised its discount window rate (for short-term loans to banks) by 0.25 percentage points to 0.75%, the mild January inflation report will give the central bank more time to continue its accommodative monetary policy for a while longer to stimulate the U.S. economy.
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