On the face of it that doesn’t make sense. Deflation was back last month, with the US CPI index reducing by 0.6%, and yet, inflation fears are growing.

The explanation: it lies in the difference between the headline index, and the index analysts believe has more relevance, which strips out volatile food and energy costs.

The US CPI index without volatile food and energy costs rose 0.2%, just like it did in October, which itself saw the biggest monthly rise since March. What does this mean for US interest rates? Actually very little. There’s an 18 month time lag between inflation and a change in interest rates. So all that the current level of underlying US CPI inflation means is that the Fed was right to up rates last year.

© Investment & Business News 2013