U.S. inflation up 0.7% in December, well below the Fed’ds 2% target

The Federal Reserve’s preferred inflation gauge notched its lowest year-over-year increase since just after the recession, complicating the calculus for the central bank on when to lift short-term interest rates from near zero.

The price index for personal consumption expenditures was up 0.7% in December from a year earlier, the Commerce Department said Monday. That was the smallest 12-month gain for consumer prices since October 2009, and it marks the 32nd consecutive month below the Fed’s 2% inflation target.

A swift fall in oil and related energy products is responsible for the decline in overall inflation from 1.6% in July. Fed officials have largely dismissed the pullback as a “transitory” factor that will ultimately prove short-lived.

But energy isn’t the only factor in the economy weighing on price gains. “Stagnant household incomes have resulted in a lack of demand for retailers and manufacturers,” said Navy Federal Credit Union economist Alan MacEachin. “They don’t have any pricing flexibility.”

Inflation has been steadier outside of volatile food and energy prices. But that measure of “core” inflation also slipped slightly in recent months, from a 1.5% annual advance in October to 1.3% in December.