The consumer price index reaccelerates in January
The headline consumer price index (CPI) rose by 0.5% in January, a sharp single-month acceleration that matches the highest one-month increase since last June. Over the past year, the index rose by 6.4%, a modest uptick from the month prior. Core inflation, which excludes more volatile food and energy prices, rose by 0.4% for the month and 5.6% for the year, fractionally above expectations.
There are signs that the peak is in, but that the path back to the Fed’s target could be a slow one. Food prices rose by a comparatively muted half-percent in January but are up more than 10% over the past year. It’s been a key driver of consumer inflation and is particularly tough to swallow for lower-income households, which spend a much higher percentage of their income on food.
Energy prices also bounced back in January after declining late last year, rising by 2.0%. Certainly, disruptions caused by the war in Ukraine and related sanctions have played a role, but the easing of restrictions in China and expectations that economic growth there is poised to accelerate is expected to lift demand for energy commodities.
Also notable is the continued significant upward pressure on shelter costs, which have risen by nearly 8.0% over the past year. The 0.7% monthly increase was in line with the average over the past six months. The housing market has clearly retrenched in response to surging prices and higher mortgage rates in the past year, but that’s not yet apparent in the shelter cost component of the index. That should provide a source of relief as the year progresses but hasn’t appeared yet.
The problem created by tight labor market conditions can’t be overlooked, particularly in the service sector. Upward pressure on wages may be easing, but in the absence of greater productivity gains, consumer demand for services and a scarcity of workers will remain a challenge to the Fed’s goal of bringing its preferred measure of broad-based inflation back to 2%.
In recent months, improvement in price gauges provided a spark of optimism and hope that the Fed’s aggressive tightening was succeeding. That’s still the case, but the path back to target inflation could prove to be longer than hoped, particularly with limited progress in the Fed’s goal of creating some slack in labor market conditions. Job cut announcements have picked up considerably in recent months, but other gauges of the labor economy remain tight. Unemployment claims remain exceptionally limited and unemployment hasn’t been lower since the early 1950s. The slack the Fed is looking for is only starting to appear. The 3.4% unemployment rate is well below the Fed’s forecast for 4.6% at the end of the year and would require a much more significant increase in job losses to bridge that divide.
Although the full impact of already implemented rate hikes hasn’t been felt and should continue to put the brakes on the economy in the coming months, there’s little reason for the Fed to pause yet. The question is whether policymakers will feel compelled to go even further than their current forecasts suggest and, in doing so, potentially slamming the door on any soft-landing scenario. How patient will the Fed be in their data dependence? That remains to be seen.
The bottom line? Inflation is easing, but it’s not going to be a direct, rapid path back to the Fed’s target. There will be some bumps along the way, and frustrating delays that could keep inflation higher than policymakers, businesses, or consumers would prefer. That means more policy tightening from the Fed, and a growing risk that higher rates will choke off the expansion.
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