A key inflation indicator was higher than expected last month


Inflation cooled less than expected in January and showed worrying staying power after volatile food and fuel costs were excluded, a reminder that controlling price increases remains a tense and bumpy process.

The general Consumer's price index rose 3.1 percent from a year earlier, down from 3.4 percent in December but higher than the 2.9 percent economists had predicted. That figure is down from the last peak of 9.1 percent recorded in the summer of 2022.

But after excluding food and fuel, whose prices fluctuate from month to month, “core” prices remained more or less stable on an annual basis, rising 3.9 percent from a year earlier. The measure saw the biggest monthly jump in eight months.

American consumers, the White House and Federal Reserve officials had welcomed the recent moderation in inflation. Central bankers in particular are likely to take the new report as a reminder to remain cautious. Officials have been careful to avoid declaring victory over inflation, insisting they needed more evidence that it was declining sustainably.

Investors strongly reduced chances of an imminent rate cut by the Federal Reserve, betting that central bankers will not lower interest rates at their next meeting in March and sharply reducing the odds that the Fed will do so even at its May meeting , a sign that they believe the new inflation figures will keep officials cautious. Stock markets fell as traders revised their forecasts for the Fed's actions.

Fed policymakers have raised interest rates to around 5.3 percent, from near zero in early 2022, in a bid to cool consumer and business demand and force companies to stop raising rates. prices so quickly. Because inflation has been coming down noticeably in recent months, they have paused their rate hikes and are contemplating when and how much to reduce borrowing costs.

But they want to avoid cutting rates before inflation has completely died down, because they worry that doing so could allow rapid price increases to become a more permanent feature of the U.S. economy.

“They were right to be patient, because this is the kind of number that is going to call into question whether there is really much slowdown in store for inflation,” said Omair Sharif, founder of Inflation Insights. “This is definitely a scary figure.”

The slowdown in inflation in recent months was also a welcome development for President Biden. Rising living expenses have consumed household budgets, weighing on voter confidence even though the labor market is strong and wages are rising at a rapid pace. As price increases have begun to slow, people have begun to report more optimistic economic prospects.

But the new inflation report could cast doubt on whether the cooling of the previous six months will continue. The Federal Reserve has been paying close attention to whether that trend would persist.

“Is it sending 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, during his January 31 press conference. “That is the question.”

The Federal Reserve targets average inflation of 2 percent using a separate but related measure, the Personal Consumption Expenditure Index. that caliber is ready for launch on February 29.

Part of the problem with Tuesday's report, from the Fed's perspective, is that the spike in the core inflation rate came from services: the prices of airfare, hotel rooms, haircuts and aid. financial rose in January. Services inflation tends to be driven by slow-moving forces, such as wage growth, and can be very persistent.

And while the better-than-expected inflation numbers were just one month's data, they came with other evidence that the economy was growing faster than expected. Hiring collected in January, salary growth was solid and consumers keep spending.

Some analysts have suggested that in such a hot economy, fighting inflation the rest of the way to normality will prove more difficult than the initial cooldown. In other words, the “last leg” of inflation could be the most difficult. Tuesday's report could give more weight to that argument.

“It's too early to claim victory over inflation,” said Torsten Slok, chief economist at Apollo Global Management. He noted that key economic measures, such as hiring, rebounded after the Federal Reserve hinted late last year that it had ended rate hikes, evidence of the potential risks of backtracking too soon.

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

So far, reducing inflation has been less painful than economists expected. Many had predicted that a substantial cooling of the economy (and a rise in unemployment) would be necessary to reduce price increases. Instead, inflation has fallen gently even with a strong labor market.

The cooling came in part as supply chains recovered. Prices for goods began to rise in 2021, as pandemic-related shipping routes and factory disruptions led to shortages of semiconductors, cars and furniture. Those problems have become clearer, allowing the prices of goods 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 service price increases moderate without a broader economic slowdown?

For a while, that seemed to be happening, but the trend stalled in January. Economists will likely watch data in the coming months to determine whether this is a blip or the start of a worrying new trend.

One category of services is likely to continue to receive special attention: housing. Rents have risen more slowly in recent months, and many analysts have expected that trend to continue as new, cheaper rents are factored into official inflation figures. Housing represents such a large portion of American spending that the expected cooling would help reduce overall inflation.

But the January report offered reason for caution. A measure that estimates how much it would cost to rent a home someone owns (called owner's equivalent rent) rose monthly.

The acceleration “seems contradictory to other surveys of rental data that we track,” said Blerina Uruci, chief U.S. economist at T. Rowe Price.

Overall, he said, the report underscores that the Federal Reserve will need to remain cautious.

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

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