A major inflation gauge came out warmer than expected last month.
Inflation cooled less than expected in January and showed worrying staying power after removing volatile food and fuel costs – a reminder that bringing price increases under control remains a bumpy process.
The whole Consumer price index was 3.1 percent higher than a year earlier, which was lower than the 3.4 percent in December, but higher than the 2.9 percent that economists had predicted. That figure is lower than the last peak of 9.1 percent in the summer of 2022.
But after excluding food and fuel, which fluctuate in price from month to month, “core prices” remained roughly stable year-over-year, up 3.9 percent from a year earlier. On a monthly basis, the measure has increased the most in eight months.
Federal Reserve officials had welcomed a recent moderation in inflation and are likely to take the new report as confirmation that they should remain cautious. Policymakers have been careful to avoid declaring victory over inflation, stressing that they need more evidence that inflation is falling sustainably.
Investors sharply reversed chances of an imminent rate cut in the wake of the data, betting that the Fed won't cut rates at their next meeting in March and sharply dialing back the odds that it will even do so at their next meeting in May – a sign that they think the new inflation figures will keep officials on their toes.
Fed policymakers have raised interest rates to about 5.3 percent, up from near zero in early 2022, in an effort to cool consumer and business demand and force companies to stop raising them so quickly of the prices. As inflation has fallen significantly in recent months, they have suspended their rate hikes and are considering when and how much to cut borrowing costs.
But they want to avoid cutting rates before inflation is completely extinguished, fearing it could make rapid price increases a more permanent feature of the U.S. economy.
“They were right to be patient, because these are the kinds of numbers that cast doubt on whether there really is much of a slowdown ahead for inflation,” said Omair Sharif, founder of Inflation Insights. “This is definitely a scary number.”
Slower inflation in recent months has also been a welcome development for President Biden. The rising cost of living has eaten away at household budgets and weighed on voter confidence, even as the labor market is strong and wages are rising at a rapid pace. As price increases begin to subside, people are starting to report brighter economic prospects.
The question for both the administration and the Fed is whether the inflation cooldown of the past six months can continue — and the new inflation report could keep officials on edge.
“Does this give us a real signal that we are in fact on a path – a sustainable path – to 2 percent inflation?” Jerome H. Powell, chairman of the Federal Reserve, said this during his January 31 press conference. “That is the question.”
The Fed targets an average inflation rate of 2 percent using a separate but related measure: the Personal Consumption Expenditures Index. The January value of that meter is ready for release on February 29.
Inflation has fallen for a variety of reasons, but a big driver of the recent improvement has been the recovery of global supply chains. Prices for goods began to rise in 2021 as shipping lanes and factory disruptions caused by the pandemic caused shortages of semiconductors, cars and furniture.
These problems have slowly disappeared and commodity prices have recently cooled – and fallen for some products. For example, used car prices fell sharply in January.
More recently, price increases for key services have also begun to decline. Economists are now keeping a close eye on what happens to one thing in particular: housing. According to official inflation data, rent increases are starting to slow, but many analysts expect this trend to deepen as cheaper new leases are slowly included in the official data.
But on that point, the January report offered reasons for caution. A measure that estimates how much it would cost to rent a home that someone owns – called the owner's equivalent rent – collected monthly.
The acceleration “is at odds with other rent data studies we monitor,” said Blerina Uruci, chief U.S. economist at T. Rowe Price.
Still, the numbers mean the Fed will have to remain cautious — and that officials are unlikely to cut rates until May or June.
“They really need to make sure that inflationary pressures won't rise again before they can cut rates,” Ms. Uruci said.