Consumer inflationary pressures grew at a moderate rate in January 2020.

The core Consumer Price Index (CPI), which excludes food and energy, rose 2.3% year over year last month, near the fastest pace of this economic cycle and in line with recent months. As shown in the LPL Chart of the Day, core CPI growth has been steady, thanks to firm U.S. demand and relatively benign producer price and wage growth.

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In recent months, investor concerns have toggled between the future path for inflation potentially becoming too low or too high. Inflation significantly lower than the Federal Reserve’s (Fed) 2% target can signal a lack of aggregate demand and potential economic weakness, while runaway inflation erodes purchasing power and can force the Fed to raise interest rates. We believe, though, that the current trajectory of inflation presents a supportive middle ground for the economy.

“Inflation continues to grow at a healthy pace, which should provide a stable platform to enable future economic growth,” said LPL Financial Chief Investment Strategist John Lynch. “The Fed has signaled its reluctance to change its policy interest rate unless it observes a material change to its economic outlook, and this report will do little to change its projections.”

While the widely tracked core CPI number is slightly north of the Fed’s 2% target, the Fed’s preferred inflation gauge, core Personal Consumption Expenditures (PCE), has persistently come in below target. Historically, year-over-year core CPI growth has run 25 to 50 basis points (0.25–0.5%) higher than core PCE, so January’s core CPI reading likely hints at a continued PCE undershoot and sidelined Fed. January core PCE data is released on February 28.

 

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This Research material was prepared by LPL Financial, LLC.

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