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1st increase in 3 months seen in cost of living
WASHINGTON (1/17/14)--The most prominent measure of inflation rose in December for the first time in three months, according to U.S. Labor Department data.

The consumer price index increased by a six-month high of 0.3% after stagnating in November and receding by 0.1% in October. The core CPI, which excludes fuel and food costs, only expanded by 0.1%, down from 0.2% in November.

Cost of living increases were driven by the price of energy, a measure of which rose by 2.1%. Seasonally adjusted gasoline prices, which were up by 3.1%, led the expansion. The CPI for food and beverage, meanwhile, was only up by 0.1%.

Core CPI growth was driven by rent indexes, which were up by 0.2% after growing by 0.3% in November. Measures of new and used vehicles, medical care, household furnishings and airfare either stagnated or declined (Economy.com Jan. 16). Medical goods and services plunged particularly dramatically, with prescription drug costs falling by 0.8%--their largest drop since 1967 (Bloomberg.com Jan. 16).

On an annual basis, core CPI, energy and food inflation were at three-year lows. Core inflation finished 2013 at 1.5%, a decrease of 0.2 percentage points from 2012. The energy index rose by 0.4%, down from rates above 7% in 2010 and 2011. Moody's said that the acceleration in food prices declined to their smallest increase since 1976.

Despite prices increasing only modestly throughout the year, real income barely grew. Hourly earnings adjusted for inflation were only up by 0.2% in 2013, after a 0.3% drop in December.
Moody's is predicting that prices will rise at a faster pace in 2014, driven by wider economic growth. The ratings and research firm said that the apparent end of fiscal policy uncertainty in Washington D.C. has improved its outlook, but that relatively weak inflation should keep the Federal Reserve from tapering its asset purchases by too much.

Bloomberg said that demand-push price increases in rental housing and clothing indicates that the Fed has succeeded in reversing deflationary pressures, allowing the central bank to continue to reduce quantitative easing over the coming months. It highlighted recent remarks by Chicago Fed President Charles Evans about a possible reduction in asset-purchases allowing the bank to focus on keeping nominal interest rates near zero for a longer amount of time.


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