Inflation Remains Elevated in January, Complicating Fed's Path
New inflation data released Wednesday reveals that consumer prices rose more than anticipated in January, as core inflation reversed its easing trend from December. The latest numbers from the Bureau of Labor Statistics (BLS) indicate that the Consumer Price Index (CPI) increased 3% year-over-year, an uptick from December's 2.9% annual gain.
The index rose 0.5% month-over-month, the largest monthly headline increase since August 2023 and a slight acceleration from the 0.4% rise in December. Economists had projected a 0.3% increase. Seasonal factors such as higher fuel costs and persistent food inflation contributed to the elevated headline figures. Notably, the index for eggs surged by 15.2%, representing the sharpest increase since June 2015. This accounted for approximately two-thirds of the total monthly food-at-home increase, according to the BLS. Year-over-year, egg prices have skyrocketed by 53%.
Stripping out the more volatile costs of food and gas, core prices climbed 0.4% over the previous month in January, exceeding December's 0.2% monthly gain and marking the largest monthly increase since April 2023. Core inflation year-over-year reached 3.3%, up from 3.2% in December, the first time since July that core CPI had not shown a deceleration in price growth over the prior year. Elevated shelter and services costs, including insurance and medical care, have sustained core inflation at higher levels. However, shelter costs exhibited signs of easing last month, with a 4.4% annual increase, the smallest 12-month gain in three years. Similarly, the year-over-year increase in rent was the slowest since February 2022.
Used-car prices, on the other hand, saw a significant uptick for the fourth consecutive month. The index rose 2.2% in January, following a 1.2% increase in December and a 2% monthly gain in November. Used cars likely contributed to the overall surge in core goods, which reached its highest level since May 2023.
Although inflation has moderated, it remains above the Federal Reserve's 2% target on an annual basis. Economists and Fed officials anticipate a "bumpy" road ahead. "This is a familiar disappointment," said Claudia Sahm, chief economist at New Century Advisors, noting that the start of a new year has previously resulted in upside surprises. "So this isn't a deal breaker for the year as a whole, but it is certainly not a good way to start things off."
The Federal Reserve's path forward for interest rates has become more complex due to the ascension of Donald Trump to the presidency. Economists argue that the US could face renewed inflation as Trump implements protectionist trade policies.
Shortly after the inflation data release, traders lowered expectations for a Fed rate cut, pricing in only one reduction from the central bank this year. Stocks initially sold off but recovered somewhat by mid-afternoon trade. "The Fed is never going to overreact to one month of data," said Sahm. "They've been telling us since December that they are in no hurry to adjust rates again, and that will be reinforced today."