US January Inflation Rate Rose More than Expected

Location: Toronto
Author: RBC Financial Group Economics Department
Date: Friday, February 18, 2011

U.S. consumer prices increased by 0.4% in January 2011, thereby beating market expectations for a 0.3% increase, although in line with RBC's forecast. The annual inflation rate rose to 1.6% as a result, slightly faster than December 2010's 1.5% pace. Core inflation, which excludes food and energy prices, posted a 0.2% monthly gain, also beating expectations for a 0.1% rise, and the annual rate rose to 1.0%. The rise in the core inflation rate marked the third consecutive increase from October 2010's 0.6% all-time low.

Higher gasoline prices once again made their mark on inflation although the pace of increase slowed to 3.5% from the 6.7% jump recorded in December. Food prices rose by 0.5% in the month and were 1.8% higher than a year earlier. The annual pace of food price inflation stood at the highest level since June 2009. Clothing prices rose 1.0% in January 2011 although were unchanged relative to the level a year earlier. Airfares increased by 2.2% in January 2011 and were 9.8% higher than in January 2010.

Today's report indicates a very mild rate of inflation exists in the U.S. economy. While growth prospects have improved in recent months, the degree of excess capacity is restraining any upward pressure on prices and will likely continue to do so in the near term. Even our above-consensus forecasted growth in 2011 and 2012 will not erase the large output gap although a persistent narrowing of that gap is consistent with the core inflation rate gradually increasing in the forecast horizon. The Federal Reserve's January meeting minutes showed that policymakers also expect inflation to remain benign, although given the recent strengthening in the economy's growth momentum, the risks of deflation have been marked down significantly. There is nothing in today's report that indicates that price pressures are accelerating, with the three-month seasonally-adjusted trend rate at 1.0% and the six-month rate trailing along at 0.9%. The Fed indicated that its confidence that the economy is on a sustainable growth path has grown in recent months but also said that incoming data "would need to be solid for a while longer to justify a significant upward revision to their outlook." Today's report provides no support for any changes to its current policy stance.

In a separate report, initial unemployment insurance claims rebounded to 410,000 in the week ending February 12, 2011 following the previous week’s 34,000 decline to a revised 385,000 level (initially reported as 383,000), which was the lowest level of new claims since July of 2008. The rise in the latest week was slightly larger than market expectations for claims to edge up to 400,000. The four-week moving average of initial claims, which normally provides a better indication of the underlying trend in labour markets, inched higher to 417,750 from 416,000 for the prior week. Continuing claims (for the week ending February 5, 2011) were 3,911,000 from 3,910,000 the prior week.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

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