Inflation was still hot in January, but some prices are cooling off

By Alicia Wallace, CNN

Inflation surged in January by the most in three months, according to the latest Consumer Price Index released Tuesday.

But despite the monthly increase of 0.5%, inflation continued to slow on a year-over-year basis to 6.4%, according to the Bureau of Labor Statistics. That’s down from December’s 6.5% but higher than economists’ projections of 6.2%, according to Refinitiv.

It’s the seventh consecutive month that annual inflation has declined.

There were no major Valentine’s Day surprises for the latest read on inflation.

“It doesn’t necessarily change the trend,” said Erik Lundh, principal economist at the Conference Board. “It’s a bumpy road to go from where we were to where we want to go.”

Monthly prices were largely pushed up by shelter costs, which accounted for nearly half of the increase, the BLS reported. Higher costs for food, gasoline and natural gas also contributed.

On an annual basis, food prices remain well above overall inflation rates: Food-at-home prices are up 11.3%, with egg prices up 70% year over year, according to BLS data.

Taking out food and energy prices, which tend to have more volatility, the core CPI index increased 0.4% from December, matching the monthly gain seen previously, but moderated on an annual basis to 5.6%, from 5.7%.

Consensus estimates called for monthly core growth of 0.4% and year-over-year gains of 5.5%.

“At the end of the day, even though we’ve got a lot of heavy discounting out there, we still have underlying inflation that is still too warm for the Fed and for most households,” said Diane Swonk, chief economist with KPMG. “We’re looking for that ‘just right’ porridge, and we’re not there yet. It’s still too hot.”

Uncharted territory

While economists were expecting the first report of the year to show a monthly gain of 0.5% and annual inflation continuing to cool, they were also bracing for some uncertainty.

Just 11 days ago, the BLS delivered a shocker of a January employment report that showed the US economy added 517,000 jobs last month and unemployment dipped to a level not seen since May 1969. The monthly job gains could eventually be revised downward, but at nearly three times economists’ expectations, that stellar total underscored that bringing down inflation could be a long, drawn-out battle.

Federal Reserve Chair Jerome Powell said as much during an economic discussion last week.

“Our message [at the last meeting] really was this process is likely to take quite a bit of time,” he said during a question-and-answer session with David Rubenstein of the Economic Club of Washington DC. “It’s not going to be, we don’t think, smooth. It’s probably going to be bumpy. And so we think that we’re going to need to do further rate increases, and we think that we’ll need to hold policy at a restrictive level for a period of time.”

Part of that is because this inflationary period and the factors that pushed prices higher are complex, Swonk said, noting the influence of the pandemic, geopolitical events, extreme weather and companies’ pricing approaches.

“At the end of the day, when people say, ‘Well, what’s causing inflation?’ everybody has one answer, and the real answer is, ‘all of the above,'” she said. “If it was easy, it would have been solved already.”

If it was only a supply shock, it would have passed, she said, adding that a sole demand shock would already have been knocked down by interest rate hikes.

“If it was only one thing, we would know what to do, and that’s what is making it so complicated,” she said. “There are so many factors causing this particular inflation that make this cycle different.”

Data calculations play a role

Another wild card is the data itself and how it’s calculated and revised. This is the first report to reflect a new weighting adjustment by the BLS, which is now weighting consumer spending data on a single year versus every two years. So this year’s weighting is heavily influenced by 2021 spending patterns, when American consumers were still going heavy on goods purchases.

“So for this year, going forward, we should expect prices to be slightly lower on the CPI basket than they would have, had we maintained the old weighting system from last year,” said Richard de Chazal, macro analyst with William Blair.

Additionally, the BLS last week released the results of its annual benchmarking of seasonal adjustment factors going back five years. The latest annual adjustments showed higher monthly inflation gains during the fourth quarter: October was revised up to 0.5% from 0.4%, November to 0.2% from 0.1%, and December to 0.1% from -0.1%.

“It’s more persistent and a higher pace of inflation than we had hoped,” Swonk said.

Other calculations could tell a different story in the months to come.

The shelter component of CPI typically lags market conditions by 12 months. Home prices and rents have cooled during the past year, so it’s expected that the CPI soon will reflect that, the Conference Board’s Lundh said.

“There’s a lot of layers to these data, but if you take them all into consideration, it wasn’t a great month, but it’s nothing to lose too much sleep about,” Lundh said. “If it happens again next month, then there’s a problem.”

Inflationary pain persists

January’s CPI also showed that the services excluding housing index — a closely watched measure by the Fed because of its connection to the tight labor market — increased 0.6% in January and is up 7.2% over the year.

“The broad-based improvement needed to be seen in order to feel good about where inflation is headed is still lacking,” Greg McBride, chief financial analyst for Bankrate, said in a statement Tuesday.

There is nothing to deter the Fed from another quarter-point hike, he added.

“Inflation has shredded household budgets over the past two years, and not just when it comes to one-off discretionary expenses or special occasions, but for keeping up with day-to-day bills,” he said.

“Until inflation returns to the 2% neighborhood, pressure on household finances will continue.”

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