The latest data reveals that an inflation gauge favored by the Federal Reserve witnessed an increase in January, indicating that the deceleration in U.S. consumer price growth is unfolding unevenly on a month-to-month basis.
According to government reports released on Thursday, prices rose by 0.3% from December to January, a notable uptick from the 0.1% increase recorded in the preceding month. However, there is a positive aspect to note: prices were up by just 2.4% compared to the same period a year earlier, marking a decrease from the 2.6% annual pace observed in December and marking the smallest increase in nearly three years.
While the year-over-year moderation in inflation is likely to be viewed favorably by the White House as President Joe Biden seeks re-election, concerns persist among Americans regarding the overall price levels, which remain significantly higher compared to pre-inflation levels three years ago. This sentiment, evident in various public opinion polls, could potentially pose a challenge to Biden’s re-election prospects.
The January increase in month-to-month prices is expected to reinforce recent expressions of concern by Federal Reserve officials regarding the risks associated with premature interest rate cuts this year. Minutes from the Fed’s most recent meeting in January indicated that most policymakers were cautious about reducing rates prematurely, emphasizing the need for inflation to sustainably return to the Fed’s 2% target before considering rate adjustments.
Thursday’s data “very much explain why they were right to be cautious,” remarked Omair Sharif, founder of Inflation Insights, a consulting firm, in reference to the Fed officials’ stance. “They continue to want to get more confidence.”
Excluding volatile food and energy costs, commonly referred to as “core” prices, recorded a 0.4% increase from December to January, up from 0.1% in the previous month and marking the largest increase in a year. On a year-over-year basis, core prices rose by 2.8%, marginally down from 2.9% in December. Economists consider core prices as a more reliable indicator of future inflationary trends.
Despite the recent uptick in January, core inflation had registered three consecutive months of notably low readings. Moreover, in the latter half of the previous year, core prices had risen at a modest annual rate of just 1.9%.
While Federal Reserve officials have welcomed the long-term moderation in inflation, signaling potential rate cuts later this year, most economists anticipate the first reduction to occur in May or June.
A notable factor contributing to the containment of price increases is the growing consumer resistance against persistently high prices, particularly for essential goods such as packaged foods and automobiles. CEOs across various sectors, including PepsiCo, McDonald’s, and General Mills, have acknowledged consumer pushback against steep price hikes, resulting in adjustments to pricing strategies.
The prevailing trend of consumer pushback against high prices is exemplified by individuals like Shannon LoConte, who has altered her purchasing behavior in response to escalating prices. LoConte, residing outside Charleston, South Carolina, emphasized the necessity of budget-conscious shopping amid rising prices.
Inflation, as measured by the Fed’s preferred gauge, experienced a decline last year after reaching a peak of 7.1% in the summer of 2022. Supply chain disruptions have subsided, contributing to reduced costs of materials and parts, while a steady influx of job seekers has facilitated employers’ ability to contain wage increases, which are key drivers of inflation. However, inflation remains above the central bank’s 2% annual target.
Following 11 consecutive rate hikes beginning in March 2022, the Fed aims to counteract the most severe bout of inflation witnessed in four decades. These rate hikes have effectively dampened inflation. However, they have also resulted in higher borrowing costs for consumers and businesses, thereby impacting economic sectors such as housing. Conversely, future rate cuts by the Fed are expected to lower borrowing costs across the economy.
The increase in inflation from December to January was driven primarily by higher costs for services such as healthcare, hotel accommodations, and restaurant meals. Notably, hospital services have become more expensive due to elevated labor costs for healthcare professionals. This trend underscores the persistence of inflationary pressures in the service sector compared to the goods sector.
While the report indicated a 1% increase in incomes from December to January, driven by a 3.2% rise in cost-of-living adjustments for Social Security and government benefits, consumer spending rose only by 0.2%. Consequently, Americans saved slightly more last month.
Some of the inflation observed in January can be attributed to seasonal factors, as companies often raise prices in the early months of the year. Analysts anticipate prices to normalize in the spring, aligning with the milder pace of increases observed in the latter half of 2023.
Thursday’s inflation data aligns with earlier reports released this month, indicating a faster rise in the government’s widely followed consumer price index in January compared to previous months. The Fed favors the measure reported on Thursday, as it accounts for changes in consumer behavior during periods of heightened inflation.
Several Fed officials remain optimistic that inflation will gradually recede toward the Fed’s target level, downplaying the recent uptick in prices as a temporary phenomenon.
“The path will continue to be bumpy, and we should not overreact to individual data readings,” remarked Susan Collins, President of the Federal Reserve Bank of Boston, emphasizing a cautious yet optimistic outlook for the economy’s trajectory. “I remain what I call a ‘realistic optimist’ in thinking that the economy is on a path to 2% inflation on a sustained basis while maintaining a healthy labor market.”
Outside the Fed, most economists anticipate a gradual slowdown in inflation in the coming months, with projections suggesting a decline in core inflation to 2.2% by May — a level low enough to prompt rate cuts by the Fed in June, according to forecasts by economists at Goldman Sachs.
