Rising rents and rising gasoline prices helped keep US consumer prices elevated in January, according to government data released Tuesday, with little easing signaling that policymakers’ war is not over.
The US central bank has raised interest rates rapidly in the past year to raise borrowing costs and dampen demand in the world’s largest economy, as inflation rises.
But even though the consumer price index (CPI), a key measure of inflation, eased from last year’s peak, the numbers showed some areas of stickiness.
With policy effects rippling through the economy, the CPI rose 6.4 percent in January from a year ago, according to Labor Department data. This is a touch below the December figure and the smallest annual increase since October 2021.
But it remains well above policymakers’ two percent target.
From December to January, the CPI rose 0.5 percent, up from 0.1 percent in December and signaling that the Fed has some way to go to tackle costs.
“The index for shelter was the largest contributor … accounting for about half of the monthly increase,” according to the report.
Indices for food and petrol also contributed, the report added.
Excluding volatile food and energy components, core CPI is said to have risen 5.6 percent since January 2022, also the smallest increase in a year.
– ‘Higher for longer’ rates –
Annual changes in overall inflation and services inflation excluding volatile and housing components “show only modest improvements,” said Rubeela Farooqi, chief US economist at High Frequency Economics.
“For Fed officials, the slow decline in inflation only supports a higher view of interest rates,” he warned.
While overall prices have slowed, the easing in core inflation has been more uneven, Farooqi earlier noted.
Commodity prices have eased as supply chains are disrupted but a strong labor market is supporting income and, in turn, demand.
The core figure has fluctuated in recent months, falling to 5.9 percent in June before rising to 6.6 percent in September and falling again.
– ‘Sticker’ component –
“You don’t want to make too much out of one month. It’s like making a mountain out of an ant hill,” remembers Ryan Sweet of Oxford Economics. He noted that supply chain stress and energy prices could move the needle on the monthly CPI.
“Some of the stickier components are the ones that will get more attention, for example rent,” he told AFP.
He believes that rental costs “will not rise until the second half of this year,” when wage growth remains strong and there is still demand for spending on services.
“During the pandemic, people diverted spending from services because they couldn’t go out to restaurants, bars, sporting events,” he said.
With the easing of Covid-19 restrictions, people are now returning to services, which is driving a lot of consumer spending, Sweet said.
While goods inflation will continue in the coming months, it will take a significant amount to offset the services inflation that is in the pipeline.
Meanwhile, analysts believe that the Federal Reserve is looking at the cost of services excluding housing, food and energy.
“Policymakers have more work to do to bring inflation back to the target and will likely continue to raise rates and will keep policy tight for some time,” Farooqi said.
On Monday, Fed Governor Michelle Bowman warned in a speech that “it is necessary to tighten monetary policy to bring inflation down to our target.”
He added that, with the economic outlook remaining uncertain, “I expect that we will continue to be surprised by economic and geopolitical developments and the data that will come.”