Low gas prices have had an unexpected consequence

U.S. consumer prices in January posted their biggest drop since 2008 as gasoline prices continued to tumble and underlying inflation rose modestly, which could allow a cautious Federal Reserve more room to hold off on raising interest rates.

Other data on Thursday showed a rebound in business investment spending plans, but probably not enough to change expectations of moderate economic growth in the first quarter.

“It will be some time before the Fed gets the necessary confirmation that inflation will move back to target in the medium-term, and we continue to see September as the most natural starting point for the lift-off in rates,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

The Labour Department said its Consumer Price Index fell 0.7 per cent last month, the largest decline since December 2008, after slipping 0.3 per cent in December. It was the third straight month of decline in the index.

In the 12 months through January, the CPI fell 0.1 per cent, the first decline since October 2009 and a sharp deceleration from December’s 0.8 per cent rise.

Fed officials have long viewed the energy-driven drop in inflation as transitory. The U.S. central bank has a 2 per cent inflation target.

Fed Chair Janet Yellen told lawmakers this week that the central bank’s policy-setting committee “needs to be reasonably confident that over the medium-term inflation will move up toward its 2-per cent objective” before it starts to raise interest rates.

Policymakers could take comfort from a marginal rise in underlying price pressures. The so-called core CPI, which strips out food and energy costs, rose 0.2 per cent in January after edging up 0.1 per cent in December.

Economists, however, believe the effects of lower energy prices and a strong dollar still have to work their way through to the core CPI, which could mean tame readings in the months ahead.

The core CPI was lifted by increases in the cost of shelter, recreation and apparel prices. In the 12 months through January, the core CPI rose 1.6 per cent after a similar gain in December.

Janet yellenREUTERS/Kevin LamarqueFederal Reserve Chair Janet Yellen takes her seat to testify at a Senate Banking, Housing and Urban Affairs Committee hearing on ‘Semiannual Monetary Policy Report to Congress’ on Capitol Hill in Washington, February 24, 2015.

OIL GLUT

Softer global demand and increased shale oil production in the United States have caused an oil glut, causing crude prices to plummet.

Domestic gasoline prices plunged 18.7 per cent in January, the biggest drop since December 2008, after falling 9.2 per cent in December. Gasoline prices have now declined for seven straight months.

Separately, the Commerce Department said non-defence capital goods orders excluding aircraft, a closely watched proxy for business spending intentions, increased 0.6 per cent last month after a revised 0.7 per cent fall in December.

Business investment has been hurt by a softening global economy, as well as a strong dollar, which has dented the overseas profits of some companies. Lower crude oil prices also are undercutting demand for equipment in the oil field.

Shipments of core capital goods, which are used to calculate equipment spending in the government’s gross domestic product measurement, fell 0.3 per cent last month after rising 0.3 per cent in December.

Business spending was a drag on growth in the fourth quarter, holding the economy to a 2.6 per cent annualized pace. First-quarter growth is currently forecast at around a 2.3 per cent rate.

A second report from the Labour Department on Thursday showed initial claims for state unemployment benefits increased 31,000 to a seasonally adjusted 313,000 in the week ended Feb. 21.

The four-week moving average of claims, considered a better measure of labour market trends as it irons out week-to-week volatility, rose 11,500 to 294,500 last week.

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This article originally appeared at Reuters. Copyright 2015. Follow Reuters on Twitter.

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