The Labor Department reported on Tuesday that inflation is projected to peak through early 2023 due to increases in shelter, gas and fuel prices.
The consumer price index, which measures a broad basket of general goods and services, rose 0.5% in January, which translated into an annual increase of 6.4%. Economists polled by Dow Jones were looking for gains of 0.4% and 6.2%, respectively.
Excluding volatile food and energy, core CPI increased 0.4% monthly and 5.6% from a year ago, compared with respective estimates of 0.3% and 5.5%.
Markets were volatile following the release, with the Dow Jones Industrial Average
Down nearly 200 points at the open.
Rising shelter costs accounted for nearly half of the monthly increase, the Bureau of Labor Statistics said in the report. The component accounts for more than a third of the index and rose 0.7% on the month and was up 7.9% from a year ago. The CPI was up 0.1% in December.
Energy was also a significant contributor, rising 2% and 8.7%, respectively, while food costs rose 0.5% and 10.1%, respectively.
Rising prices mean a decrease in real wages for workers. Average hourly earnings fell 0.2% for the month and were down 1.8% from a year earlier, according to a separate BLS report that adjusts wages for inflation.
While price increases were moderating in recent months, data from January showed that inflation is still a force driving the US economy into danger of slipping into recession this year.
This has come despite efforts by the Federal Reserve to address the problem. The central bank has hiked its benchmark interest rate eight times through March 2022 as inflation reached its highest level in 41 years last summer.
“Inflation is coming down but the road to reducing inflation will not be easy,” said Jeffrey Roach, chief economist at LPL Financial. “The Fed will not make a decision based solely on one report but clearly risks are rising that inflation will not cool fast enough for the Fed’s liking.”
In recent days, Fed Chairman Jerome Powell has spoken about “disinflationary” forces at play, but the January numbers show the central bank still has work to do.
There was some good news in the report. According to seasonally adjusted prices, medical care services fell 0.7%, airline fares declined 2.1% and vehicle prices declined 1.9%. Egg prices, however, rose 8.5% and are up an astonishing 70.1% over the previous year.
An assessment of ‘super-core’ inflation
The rise in housing prices is keeping a floor below inflation, though those numbers are expected to decline later in the year.
That’s why some Fed officials, including Powell, say they are looking more closely at the “super-core” — inflation minus shelter prices of core services — in determining the course of policy. The number rose 0.2% in January and was up 4% from a year earlier.
Markets expect the Fed to raise its overnight lending rate by half a percentage point from its current target range of 4.5%-4.75% in its next two meetings in March and May. This would give policymakers time to look at the macroeconomic effects of monetary policy tightening before deciding how to proceed. Should inflation not fall back, this could mean more rate hikes.
Dallas Fed President Lori Logan warned on Tuesday that the central bank may need to raise rates further than expected, especially if the super-core remains stable in the 4%-5% range.
He said during a speech in Prairie View, “We must be prepared to continue raising rates for a longer period than previously expected, if necessary, to respond to a change in the economic outlook or to any unwanted easing of conditions.” Such a way is necessary to overcome.” Texas.
Logan said he is concerned about higher commodity inflation as China reopens from its Covid lockdown, and sees the surprisingly strong labor market as another risk.
“When inflation repeatedly exceeds forecasts, as it did last year, or when the jobs report comes in with hundreds of thousands more jobs than anyone expected, as it did a few weeks ago, confidence in either outlook It’s hard to do,” she said.
Recession prone
The next big data point will be retail sales, which arrive at 8:30 a.m. ET on Wednesday. Economists polled by Dow Jones expect the figures, which are not adjusted for inflation, to show that sales in January rose 1.9% from the previous month.
“The strength in core inflation suggests the Fed has more to do to bring inflation back to 2%,” said Maria Vassalou, a co-chief investment officer of multi-asset solutions at Goldman Sachs Asset Management. “If retail sales also show strength tomorrow, the Fed may have to raise its funds rate target to 5.5% to keep inflation in check.”