U.S. consumer prices experienced an unexpected rise in January, primarily driven by a surge in shelter costs, according to the latest report from the Labor Department. Despite concerns about inflation, experts suggest the Federal Reserve is likely to adhere to its plan of cutting interest rates in the first half of the year.
The 0.3% increase in the Consumer Price Index (CPI) last month, the highest in four months, was largely attributed to the soaring costs of shelter, which includes rents. While some economists attribute the stronger-than-expected inflation readings to challenges in adjusting data for seasonal fluctuations, Seema Shah, Chief Global Strategist at Principal Asset Management, urges caution in assuming a broader inflationary trend.
“Today’s data is not what markets or the Fed would have liked to see, but it’s important not to overreact and jump to the assumption that an inflationary resurgence is developing,” Shah said. She believes that a rate cut in March is unlikely, but May could be in play if economic activity reflects the impact of prior Fed tightening.
The January CPI data reflects changes in weighting, with the housing share rising and that of new and used cars lowering. Companies also implemented price increases at the start of the year, affecting medical care services and tobacco products. Food prices, including grocery food inflation, experienced a 0.4% rise, with notable increases in nonalcoholic beverages.
While gasoline prices dropped 3.3%, the overall CPI increased by 3.1% in the 12 months through January, a moderation from the 9.1% peak in June 2022. Annual revisions to the CPI data indicate a downward trend in inflation after the surge in 2022, as updated seasonal factors aim to remove fluctuations.
Financial markets adjusted their interest rate cut expectations to June from May, resulting in a lower opening for U.S. stocks and a rise in the dollar against a basket of currencies. Policymakers remain cautious, emphasizing the need for convincing evidence of sustained slow-path inflation before considering lowering borrowing costs.
Excluding volatile food and energy components, the core CPI rose 0.4% in January, with a significant 0.6% surge in shelter costs. Owners’ equivalent rent (OER) experienced a 0.6% jump, contributing to elevated rental inflation. While OER’s impact on January’s inflation is acknowledged, expectations are for lower readings if BLS rent measures align with private gauges.
Despite progress in lowering inflation, potential risks such as supply chain disruptions and droughts remain. Consumer prices, though still elevated, show improved measures for the Fed’s 2% inflation target. The personal consumption expenditures (PCE) price index slowed to a 1.7% annualized rate in the fourth quarter, with the core PCE price index remaining at a 2.0% rate.
