Inflation was higher than expected in January, a worrying sign for the Fed

Inflation was higher than expected in January, a worrying sign for the Fed

Inflation eased less than expected in January and showed a worrying surge remained after volatile food and fuel prices were suppressed – a reminder that controlling rising prices remains a process fraught with pitfalls and bumpy.

All Consumer price index rose 3.1 percent from a year earlier, down from 3.4 percent in December but more than the 2.9 percent forecast by economists. This figure is down from the last high of 9.1% reached in summer 2022.

But after excluding food and fuel, whose prices fluctuate from month to month, “core” prices remained roughly stable on an annual basis, increasing 3.9% from the previous year. The metric increased the most in eight months on a monthly basis.

American consumers, the White House and Federal Reserve officials welcomed a recent moderation in inflation. Central bankers in particular will likely view this new report as a reminder of their need to remain cautious. Policymakers were careful to avoid claiming victory over inflation, insisting they needed more evidence that it was falling sustainably.

Investors wall abruptly backwards chances of an imminent Fed rate cut, betting that central bankers will not cut interest rates at their next March meeting and sharply reducing the chances that the Fed will even do so at its March meeting. May – a sign that they think the new inflation figures will make officials wary. Stock markets fell as traders revised their forecasts for the Fed’s actions.

Fed policymakers raised interest rates to around 5.3%, from near zero in early 2022, in an effort to curb consumer and business demand and force companies to stop raising prices as fast. Because inflation has fallen significantly in recent months, they have paused their rate hikes and are considering when and how much to reduce borrowing costs.

But they want to avoid cutting rates before inflation is completely snuffed out, because they fear it would allow rapid price increases to become a more permanent feature of the U.S. economy.

“They were right to be patient, because these are the kind of numbers that will sow doubt about whether a sharp deceleration in inflation is actually expected,” said Omair Sharif, founder of Inflation Insights. “It’s definitely a scary number.”

The slowdown in inflation in recent months has also been a welcome development for President Biden. The rising cost of living has eaten into household budgets, weighing on voter confidence, even though the job market is strong and wages are rising at a rapid pace. As price increases began to subside, people began to report sunny economic prospects.

But the new inflation report could cast doubt on whether the slowdown seen over the previous six months will continue. The Fed is closely interested in the persistence of this trend.

“Does this send us a real signal that we are, in fact, on a path – a sustainable path – towards 2% inflation? Jerome H. Powell, Chairman of the Fed, said this during his January 31 press conference. “That’s the question.”

The Fed targets inflation of 2% on average using a separate but related measure, the personal consumption expenditures index. This gauge is ready to be released 29 February.

Part of the problem with Tuesday’s report, from the Fed’s perspective, is that the rise in the core inflation index came from services: prices of plane tickets, hotel rooms , haircuts and financial aid all spiked in January. Services inflation tends to be driven by slow forces like wage growth, and it can be very stubborn.

And while the higher-than-expected inflation numbers represent only one month of data, they add to other evidence that the economy is growing faster than expected. Hiring picked up in January, wage growth was solid and consumers continue to spend.

Some analysts have suggested that in such a hot economy, fighting inflation back to normal will prove more difficult than the initial slowdown. In other words, the “last mile” on inflation could be the hardest. Tuesday’s report could lend more weight to that argument.

“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 resumed after the Fed suggested late last year that it was done with rate increases – evidence of the potential risks of a pullback too early.

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

So far, the reduction in inflation has been less painful than economists predicted. Many had predicted that it would take a substantial slowdown in the economy – and an increase in unemployment – ​​to curb rising prices. Instead, inflation has slowly fallen, even with a strong job market.

The slowdown occurred in part as supply chains reestablished themselves. Commodity prices began to climb in 2021, as shipping lanes and pandemic-related factory disruptions led to shortages of semiconductors, automobiles and furniture. These problems have been resolved, allowing goods prices to calm down or even fall. For example, prices of used cars fell sharply in January.

But even if goods inflation fell, the question remained: Could rising service prices moderate without a broader economic slowdown?

For a while this seemed to be happening, but the trend stopped in January. Economists will likely look at data from the coming months to determine whether this is a blip – or the start of a worrying new trend.

One category of services will likely remain at the center of attention: housing. Rents have risen more slowly in recent months, and many analysts expect that trend to continue as new, cheaper leases fuel official inflation figures. Housing accounts for such a large share of U.S. spending that the expected slowdown would help reduce overall inflation.

But the January report urged caution. A measure that estimates how much it would cost to rent a home owned by someone – called owner’s equivalent rent – ​​recouped on a monthly basis.

This acceleration “seems at odds with other surveys of rent data that we monitor,” said Blerina Uruci, chief U.S. economist at T. Rowe Price.

Overall, she said, the report underscores that the Fed will need to remain cautious.

“The main 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 re-accelerate before they can cut interest rates. »

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David B.Otero

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