Inflation eased for the seventh straight month in January, helped by lower costs for used vehicles and offering some relief to consumers struggling with high prices over the past year..
Consumer Price Index (CPI) data released on Tuesday showed that prices for a range of goods and services rose by 6.4% over the past 12 months, down slightly from an annual rate of 6.5% in December and a 40-year high of 9.1% in June.
On a month-by-month basis, however, prices increased by 0.5% in January compared with a slower gain of 0.1% in December. The acceleration was driven by shelter costs.
Americans have been struggling with soaring prices since last year, resulting in a decline in the real value of their income despite historic wage increases. High inflation has also amplified the risk of a recession.
The inflation data follows last month’s surprisingly strong labor report, which showed that employers added 517,000 jobs, well above expectations and raising concerns that the economy remains too hot and could keep prices at elevated levels too long.
The latest CPI news “underscores the challenges faced by the Fed,” said John Leer, chief economist at Morning Consult. “Inflation may have peaked, but it’s not showing signs of rapidly returning” to the Fed’s 2% inflation target.
To get there, the Fed will likely have to continue hiking rates higher and longer than many anticipated.
Could inflation fall even faster? The Fed may not need to continue rate hikes, easing recession risk
Core CPI
Core CPI, a measure of inflation that strips away volatile food and energy prices, rose last month by 0.4% from December’s 0.3% increase. That put the annual core CPI inflation rate at 5.6%.
Gregory Daco, chief economist at EY, said the rise in core CPI last month isn’t “cause for concern” since the big jump in shelter prices could mean there will be smaller increases in coming months.
Daco predicts annual inflation will fall to 2.3% by the end of the year. Core inflation, he predicts, will fall to 2.8% by then.
Housing costs drove inflation higher
Rising shelter costs were the biggest contributor to rising inflation last month and year, accounting for half of the 0.5% monthly increase in prices and 60% of the 6.4% annual inflation rate, the Labor Department said. Shelter costs rose by 0.7% last month and are up 7.9% from a year ago.
“Shelter’s contribution to inflation is likely to slow in the coming months,” Leer said.
What’s different about CPI in January?
New changes went into effect last month to adjust for shifting consumer spending patterns. By design, CPI takes into account price increases for more than 200 categories as well as the portion of the typical Americans’ budget they take up.
This is done so that the overall CPI reflects the proportional price changes consumers experience. Without taking consumers’ budgets into account the 70% increase in the price for a carton of eggs from a year ago could disproportionately skew the overarching inflation data.
Ahead of January’s CPI release the Bureau of Labor Statistics, published new weights for certain categories, a process it undergoes every two years. Moving forward, it will update the weights every year.
With the new changes, housing accounts for 44.4% of CPI, up from 42.4%. That reflects an increase in weight for shelter to 34.4% from 33.3% and rent, also known as owners’ equivalent rent (OER), which rose to 25.4% from 24.3%.
“At the moment, OER is still running hot so a higher weight will likely keep some upward pressure on core CPI in the near term,” said Deutsche Bank economist Jim Reid.
Meanwhile, food’s weighting fell to 13.5% from 13.9%.
Stock market
Stocks opened lower after the report’s release. The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite briefly turned positive but reversed course. As of 10:40 a.m. ET the Dow was down by 216 points, or 0.6%.
10-year Treasury
Yields for 10-year Treasury notes climbed after the report was released. They’re trading above 3.7%, near the highs for the month.
What January’s inflation data means for the Fed
Although the Federal Reserve doesn’t reconvene for another month, Tuesday’s CPI report combined with the latest jobs report will likely lead the Fed to raise interest rates by 25 basis points for the second time this year.
The report likely won’t give the Fed enough confidence that inflation will continue to ease on its own for it to stop raising interest rates, said Bill Adams, chief economist at Comerica Bank.
“Recent data have sent conflicting signals,” he said, noting that the latest jobs report casts the economy in a positive light as opposed to recent layoffs announcements and consumer spending and industrial production data. “The Fed will look at the balance of the signal from these data in deciding how much more to raise interest rates this year.”
President Biden reacts
President Joe Biden celebrated the inflation data saying it’s “good news for families and businesses across the country.” He acknowledged that there’s “more work to do” to get prices down and that there “could be setbacks along the way.”
Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here
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