U.S. Core Inflation Drifts Slightly Higher

Deidra 2016-11.jpg

by Deidra Krys-Rusoff
Senior Vice President

Week in Review

U.S. stocks continued their upward climb this week, with the Dow Jones Industrial Index trading above 25,775 and the S&P 500 rising approximately 1.5 percent for the week. The U.S. dollar traded off relative to the euro, which surged to a three-year high of $1.21. U.S. Treasury yields rose for the week, with the 10-year trading at 2.55 percent and the 2-year note hitting 2 percent for the first time since the financial crisis. Most international stock indices were also up, except for the Nikkei, which traded slightly lower for the week.

U.S. Core Inflation Drifts Slightly Higher

The core consumer price index (CPI), excluding food and energy rose 1.8 percent year-over-year. The slightly higher than expected CPI number was due to vehicle prices, cost of shelter and medical goods.  Gasoline prices fell 2.7 percent in December, keeping the overall inflation low.

Wage pressures may be heating up

Walmart announced Thursday that it will raise starting wages from $9 to $11 per hour.  The largest private employer in the U.S. also stated that they will pay cash bonuses of $200-$1,000 to existing employees. Walmart is also expanding parental and maternal leave policies, providing full-time hourly workers with 10 weeks of maternity leave and 6 weeks of paid parental leave. These increases are probably less about tax reform and more about keeping up with the retail market, which is struggling to hire workers in a low unemployment environment. Target raised their starting hourly wage to $11 in October, committing to raising the starting wage to $15 by the end of 2020. Costco has paid $13.50 per hour since March of 2016. We expect these increases in starting pay and benefits to influence the rate of inflation.

Why does inflation matter?

The Federal Reserve Board closely tracks inflation as one of its measures for economic stability and has targeted a yearly inflation rate of 2 percent as optimum. Today’s number moves inflation closer to 2 percent indicating a healthy economy. This could cement the Fed’s stated plan to increase the Fed fund’s rate another three times this year, from 1.50 percent to 2.25 percent. 

Takeaways for the Week

  • U.S. stocks hit new record highs

  • Core inflation crept higher in December

  • Retailers are increasing starting wages for employers