As new data shows inflation rose in January, what consumers can expect

New US government readings showing persistently high inflation rattled Wall Street on Friday.

Consumers can expect price growth to remain above average until 2023.

“Inflation will come down gradually, if the Fed conducts policy as expected,” said William Luther, director of the American Institute for Economic Research’s Sound Money Project.

“We’re looking at higher-than-normal price increases, certainly into 2023 and possibly into 2024,” Luther said.

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The Federal Reserve’s preferred measure of inflation, the private consumption expenditure price index, showed headline inflation rose 5.4% from a year ago in January and 0.6% for the month. Core inflation excluding volatile food and energy prices rose 4.7% and 0.6% for the month.

The decline in inflation that had been happening since June actually reversed in January.

“It is possible that this is just a blip, that we have increased prices more in January and less price increases in December,” Luther said.

Earlier this month, the consumer price index, a separate government measure, also showed higher-than-expected inflation for January, with a 6.4% gain over 12 months and a 0.5% increase for the month.

While the inflation rate will fall this year, “it won’t be a straight line,” Raymond James chief economist Eugenio Aleman told CNBC.com at the time.

The Federal Reserve is tasked with controlling inflation, while trying to avoid a deep economic recession.

The personal consumption expenditure price index, or PCEPI, is the central bank’s preferred measure as it seeks to bring inflation down to its 2% target.

There are two reasons why the PCEPI may be a better measure than the CPI, according to Luther.

First, the PCEPI measures all consumption expenditures, including those that do not directly come out of consumers’ discretionary income, such as those made on behalf of the government or employers.

“It places a more accurate weight on the categories of expenditures made in the economy by consumers,” Luther said.

The CPI, on the other hand, only looks at the basket of goods purchased from an individual’s discretionary income. Additionally, the basket of goods tracked by the CPI is updated annually, while the PCEPI is updated monthly.

That’s especially important if you have some individual prices that are changing a lot, according to Luther.

The Federal Reserve has made several interest rate hikes to reduce inflation.

Based on the data there, it is “almost a certainty” the central bank will raise rates by 25 basis points in March, and maybe even more, Luther said.

“If we continue to read this high inflation, there is no choice [but] to go further,” said Luther.

As the Federal Reserve brings inflation down to the target of 2%, prices will still continue to grow, although at a lower level, Luther noted.

However, prices that rise when inflation is high will never return to where they were before.

A period of below 2% inflation would be needed to see prices fall again, Luther said.

Even amid the highest inflation in 40 years, things could get worse for the typical household, Luther said.

Median real wages are roughly where they were before the pandemic and accounting for high inflation, he said.

When prices rise, many workers who see real wages fall may find new jobs or renegotiate with their current employers to increase their nominal wages, Luther said.

However, there may be a lag between prices and wage increases, which may affect these households.

Of course, not every household can negotiate for a higher nominal wage, which means their income doesn’t keep up with inflation, Luther said.