A major inflation gauge came out warmer than expected last month

Inflation cooled less than expected in January and showed worrying staying power after volatile food and fuel costs were removed – a reminder that bringing price increases under control remains a difficult and 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. The measure has increased the most on a monthly basis in eight months.

US consumers, the White House and Federal Reserve officials had welcomed a recent moderation in inflation. Central bankers in particular are likely to take the new report as a reminder to remain cautious. Policymakers were careful not to declare a victory on inflation, but stressed that they needed more evidence that inflation would fall sustainably.

Investors sharply reversed chances of an imminent Fed rate cut, by betting that central bankers will not cut rates at their next meeting in March and sharply cutting back on the odds that the Fed will do so even at its May meeting – a sign that they think the new inflation figures will keep officials on guard. Stock markets tumbled as traders revised their predictions for Fed actions.

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.

But the new inflation report could cast doubt on whether the cooling of the past six months will continue. The Fed has been closely watching to see if this trend would continue.

“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. That meter is ready for release on February 29.

Part of the problem with Tuesday's report, from the Fed's perspective, is that the rise in the core inflation index came from the services sector: Prices for airline tickets, hotel rooms, haircuts and financial aid all rose in January. Services inflation is typically driven by slow-moving forces such as wage growth and can be very persistent.

And while the higher-than-expected inflation figures were just one month of data, they came alongside other evidence that the economy was growing faster than expected. Hiring increased in January, wage growth was solid, and consumer growth was strong keep spending.

Some analysts have suggested that this hot, struggling inflation in an economy will prove more difficult than the initial cooldown the rest of the way to normal levels. In other words, the “last mile” on inflation could be the hardest. Tuesday's report could give that argument more weight.

“It's too early to declare victory over inflation,” said Torsten Slok, chief economist at Apollo Global Management. He noted that key economic measures such as hiring picked up again after the Fed hinted late last year that it was done with rate hikes — a testament to the potential risks of quitting too early.

“The last kilometer will be more difficult,” said Mr Slok.

So far, reducing inflation has been less painful than economists expected. Many had predicted that it would take a significant slowdown in the economy – and a rise in unemployment – ​​to reduce price increases. Instead, inflation has fallen slightly, even with a strong labor market.

The cooling was partly due to supply chains recovering. 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 issues have been resolved, allowing commodity prices to calm down or even fall. For example, used car prices fell sharply in January.

But even as goods inflation fell, the question remained: Could services price increases moderate without a broader economic slowdown?

That seemed to be happening for a while, but the trend stalled in January. Economists will likely be looking at the numbers in the coming months to determine whether this is a blip – or the start of a new and worrying trend.

One service category is likely to continue to receive a lot of attention: housing. Rents have risen more slowly in recent months, and many analysts expect this trend to continue as cheaper new leases feed into official inflation figures. Housing makes up such a large portion of U.S. spending that the expected slowdown would help lower overall inflation.

But 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.

Overall, the report underlines that the Fed will need to remain cautious.

“The key takeaway is that what Powell said at the January press conference was the right strategy,” Ms. Uruci said. “They really need to make sure that inflationary pressures don't rise again before they can cut rates.”