The U.S. Consumer Price Index came in a little better than expected at 0.2% on both the headline and core rates in January, but inflation is not a worry right now.

“The usual suspects committed the usual crimes in the January CPI,” says BMO Nesbitt Burns. “Medical and education costs rose sharply, keeping pressure on core services prices where an above-trend 0.4% rise was registered. Meantime, core commodities prices kept falling. This standoff between the service and goods sectors has kept overall core inflation steady lately. Hotel, apparel, and vehicle price declines helped keep the headline cool. Gasoline prices were up 2.7%.”

CIBC World Markets predicts that the headline CPI will drift higher over the course of the year “as we move past the one-year anniversary of major fuel and electricity price declines. Note that the December results shifted slightly as the seasonal adjustment factors were recalculated to include 2001 developments.”

BMO says that it believes deflation pressures in the goods sector will remain relentless in the year ahead. “Leading inflation indicators point down conclusively, and service prices will eventually be suppressed by slower growth as well. However, the lack of pricing power will make it much harder on manufacturers to grow profits, even as the economy gradually rebounds.”

“Inflation, at least in the near-term, is not a pressing issue for financial markets right now. But the tame data likely give the Fed more elbow room than markets now expect in terms of waiting for a definitive economic turn before starting on a new tightening cycle,” says CIBC. “We look for headline and core CPI to move in opposing directions, closing the gap as both converge at just below 2% late this year.”