This morning we got February Consumer Price Index (CPI) releases from both the UK and the United States. In the UK, year-over-year CPI printed 0.0% for the first time in the history of the series versus expectations for a 0.1% gain. In the US, CPI rose from -0.1% year-over-year in January to 0.0% in February, on expectations.
But for most goods and services purchased by consumers in both the UK and the US, prices are rising at a much more normal rate, well above the near-deflationary prints in headline CPI. Core prices (CPI excluding Food and Energy) in the US rose much closer to the 2% target most central banks consider to be healthy inflation.
Over time, core inflation is much, much less volatile than headline; in fact, since June of 2011, US Core CPI has had a range of 1.6-2.3%, versus a range of -0.1-3.9% for the headline series. Over the last five years, headline inflation has generally been higher than core, but that’s no longer true, and hasn’t been since oil began to collapse in price last year. In both the UK and the US (as well as many other advanced economies), the spread between core and headline CPI is near five-year highs. With core quite stable (especially in the US; the UK has seen core trend down much more consistently), any upturn in energy prices (or simply sideways movement, as we’ve mostly seen since January) will push CPI back up into positive territory, and most likely in dramatic fashion, unless something else weighs very heavily on core prices. The soaring USD will have an impact there, but how much remains unclear. In the meantime, the oil-driven decline in headline appears to have seen its worst days pass by, and barring fresh pushes lower in WTI crude below $40/barrel, it looks unlikely to return.