Inflation Cools Again, but Not as Much as Expected

Inflation Cools Again, but Not as Much as Expected

Dado Ruvic

Inflation was a bit hotter than expected in January, as consumer prices rose 3.1% on an annual basis, according to Labor Department data released Tuesday. Analysts had been forecasting a 2.9% pace, but housing and food costs helped push the overall consumer price index up more than expected.

On a monthly basis, prices rose 0.3%, versus expectations of 0.2%. Housing costs accounted for more than two-thirds of the increase.

The consumer price index has now increased by 3% or more on an annual basis for 34 months in a row – the longest streak in roughly three decades. Even so, the January result shows that the general downward trend in inflation continues. The January inflation rate was below the 3.4% rate recorded in December, and sharply lower than the 6.4% increase seen in January 2023.

Highlighting the trend: Treasury Secretary Janet Yellen said Tuesday that the latest data shows that the U.S. has made “significant progress” in the battle to bring inflation under control. “Overall inflation is down by around two-thirds since its peak; the prices of key household expenses like gas, egg[s] and airline fares have gone down,” she said.

Mark Zandi, chief economist at Moody’s Analytics, also cited the progress made in the battle against inflation over the last two years. “The January report on consumer prices was disappointing but doesn’t change the trend of decelerating inflation nor prospects for inflation to return to the Fed’s target by the 2nd half of the year,” he said. “Indeed, inflation is already below the Fed’s target save for the cost of shelter.”

But worries persist: Traders on Wall Street sent stocks sharply lower as they focused on the Federal Reserve’s possible reaction to the news. Investors have been hoping the Fed will start to cut interest rates this spring, but the higher-than-expected inflation numbers suggest that the rate cuts could be delayed until later in the year.

“There are still a lot of inflation risks out there, even though we can enjoy the moderation,” Peter Boockvar, chief investment officer of Bleakley Financial Group, told The Washington Post. “We’re being reminded that inflation is not this easy path down to 2 [percent]. I just think this gives extra reason for the Fed to just take their time.”

Higher interest rates aren’t the only concern. Former Obama administration economist Jason Furman noted that core inflation – a measure of inflation closely watched by the Fed that excludes volatile food and fuel prices – rose a higher-than-expected 0.4% in January, for a 3.9% annual rate, driven by the cost of housing, car insurance and medical care. Inflationary pressure appears to be quite sticky in the service sector and has shown signs of accelerating in recent months, even as goods inflation has turned negative.

Plenty of ordinary consumers are worried, as well. While some may welcome the news that overall inflation continues to slow, many are still struggling with the high prices that the recent inflationary episode has left in its wake. “Consumers are still feeling the pinch of higher prices for the things they buy most often,” Bright MLS chief economist Lisa Sturtevant told CBS News. “Inflation is generally moving in the right direction, down significantly from its peak of 9.1% in June 2022. But it's important to remember that a lower inflation rate does not mean that prices of most things are falling — rather, it simply means that prices are rising more slowly.”

Still, some economists say the latest data should be taken with a grain of salt. Former IMF economist Robin Brooks said the January numbers look worse than they really are and simply reflect price adjustments that take place at the beginning of each year. “These start-of-year effects are noise,” he wrote on social media. “The Fed should ignore them.”

The bottom line: Inflation continues to fall, but there are bumps along the disinflationary path, as expected. Those concerned about a possible reignition of inflation – a group that almost certainly includes analysts at the Fed – will be keeping a particularly sharp eye on the cost of services in the coming months. Even if inflation remains contained, interest rates will probably stay high for longer in 2024, with early spring rate cuts now looking less likely than ever.