US inflation rate climbs to highest since 2014

Chris Papadopoullos
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Janet Yellen Holds Press Conf. After Federal Reserve Meeting On Interest Rates
Janet Yellen's headache: Inflation is going up, but inflation expectations are going down (Source: Getty)

US inflation climbed to a rate of 0.7 per cent in December from 0.5 per cent the month before, according to figures released today.

The US Bureau of Labor Statisitcs said inflation – as measured by the year-on-year change in the consumer price index – said average food prices had climbed 0.8 per cent while energy prices had dropped 12.6 per cent.

Core inflation, which excludes food and energy and gives an indication of where inflation will go in future, rose to 2.1 per cent.

The US central bank, the Federal Reserve, raised interest in December for the first time in nearly a decade. It targets inflation at two per cent, but on a different measure called personal consumption expenditures (PCE) inflation. Core PCE is currently running just above one per cent.

James Bullard, president of the Federal Reserve in St Louis, recently warned that market inflation expectations were dropping. A drop in inflation expectations, even while measures of current inflation are rising, could create a headache for the Federal Reserve's rate-setters.

"With all the ballyhoo about falling oil prices – which stunningly continue to drive global stock markets lower – one may lose sight of the fact that the Federal Reserve continues to make progress towards meeting both of its mandates. Not only is the labour market close to full employment, but underlying inflation rates have been constantly moving higher in recent months as well," said Harm Bandholz, chief US economist at UniCredit Research.

"What makes this resilience so remarkable is the fact it occurs despite the stronger USD and despite plunging oil prices. The explanation for this is of course that in a service-based economy, such as the US, prices for services carry a much higher weight than prices for goods. And services prices are, in turn, much more dependent on the strength of the domestic economy."

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