The U.S. annual inflation rate eased to 6.4 percent in January, down from 6.5 percent in December, according to the Bureau of Labor Statistics (BLS). This was higher than economists’ expectations of 6.2 percent.
The core inflation rate, which excludes the volatile energy and food sectors, slowed to 5.6 percent year over year last month, down from 5.7 percent. This was also higher than the market estimate of 5.5 percent.
On a month-over-month basis, the Consumer Price Index (CPI) rose 0.5 percent, and the core CPI increased 0.4 percent.
Nearly all the indexes jumped on a monthly basis, with food prices rising 0.5 percent and energy costs surging 2 percent. The food and energy indexes were 10.1 percent and 8.7 percent higher, respectively, than at the same time a year ago.
Grocery store prices were still up 11.3 percent year over year, with eggs soaring 70.1 percent, lettuce surging 17.2 percent, and bread jumping 14.9 percent. Moreover, margarine costs spiked 44.7 percent, butter rose 26.3 percent, coffee advanced 12.9 percent, and baby food rose 10 percent.
On the energy front, gasoline prices rose 2.4 percent month over month, and they remain up 1.4 percent year over year. Energy services climbed at an annualized pace of 15.6 percent, including an 11.9 percent boost in electricity costs and a 26.7 percent increase in utility piped gas services.
Shelter continued to climb, surging 7.9 percent in the 12 months ending in January. Rents increased by 8 percent.
From December to January, new vehicles edged up 0.2 percent, used cars and trucks fell 1.9 percent, apparel swelled 0.8 percent, and medical care commodities rose 1.1 percent. Transportation services tacked on 0.9 percent, while medical care services dropped 0.7 percent.
This was the first CPI report to be calculated by the BLS’s new methodology.
In December 2022, the federal agency announced it would update weights annually based on a single calendar year of consumption data from 2021 rather than two years of expenditure statistics. This is a critical change because spending was weighed significantly more toward goods consumption than services, where inflation is now elevated.
Looking ahead to next month’s report, the Federal Reserve Bank of Cleveland’s Inflation Nowcasting estimate anticipates the CPI to ease to 6.4 percent and the core inflation rate to slow to 5.6 percent.
The January inflation data were a “perfect spoiler for Valentine’s Day,” says Jan Szilagyi, the CEO and co-founder of Toggle AI, an investment research firm.
“[M]arkets were expecting (hoping, praying) to get further confirmation that a) peak is in and b) decline is at least steady, if not accelerating. This is critical for the disinflationary narrative and any hope for fed cuts this year,” he said in a note. “We got neither.”
The U.S. financial markets struggled for direction following the release of the CPI report in pre-market trading, with the benchmark indexes flat.
The U.S. Dollar Index (DXY), which gauges the greenback against a basket of currencies, tanked on the data, plummeting about 0.7 percent, to around 102.60.
Treasury yields were mixed, with the benchmark 10-year yield down nearly 2 basis points, to roughly 3.70 percent.
Has the Disinflation Process Begun?
Goods price growth has slowed for the past six months, driven by easing consumer demand and improving supply-chain conditions. Consumers have also shifted their consumption toward services.
“While price growth for goods such as groceries is likely to continue slowing in the near term, upside risks for goods price growth remain a concern as much of the easy lifting sits in the rearview mirror,” Morning Consult stated in a recent report.
“Early signs of demand recovery for categories such as autos and furniture could reverse the downward trend in goods inflation, threatening to slow the Fed’s progress against inflation.”
The performance in the broader economy could also play a factor in inflation trends, warns John Lynch, the CIO at Comerica Wealth Management.
“A hard-landing scenario would be deflationary,” he said in a note. “If growth persists, inflation will likely firm, too.”
In the fourth quarter, the U.S. GDP growth rate came in at a better-than-expected pace of 2.9 percent. According to the Atlanta Fed Bank’s GDPNow model, first-quarter GDP is estimated to rise 2.2 percent.
In addition, the S&P Global U.S. Manufacturing Purchasing Managers’ Index (PMI) report found that input price inflation accelerated for the first time since May 2022.
“The January survey meanwhile brought mixed messages on inflation,” stated Chris Williamson, chief business economist at S&P Global Market Intelligence. “While costs were boosted in part by rising wage pressures, reflecting the tight labor market, tough competition once again limited scope to pass on these higher costs to customers in the form of higher prices.”
Last week, Fed Chair Jerome Powell told the Economic Club of Washington, D.C., that “the disinflationary process” and “the process of getting inflation down” has started.
The central bank chief noted that easing inflation had been seen in the goods sector, representing about one-quarter of the U.S. economy. However, services sector inflation continues to be heightened, rising to 7.6 percent in January, which could force the Federal Reserve to maintain its series of rate hikes.
“The reality is we’re going to react to the data, so if we continue to get, for example, strong labor-market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in,” he said.
According to the CME FedWatch Tool, the Fed is widely expected to raise the benchmark federal funds rate by 25 basis points for the second consecutive month at the Federal Open Market Committee (FOMC) policy meeting in March.
But Gene Inger, a former financial television analyst and author of “The Inger Letter,” noted that the U.S. central bank could “fade the pace of hikes and realize they’ve belatedly of course done almost all they can ‘really’ do.”
“The market should digest that well,” he wrote in a note.
From The Epoch Times
