Inflation Cooled Just Slightly, With Worrying Details

WASHINGTON — Inflation has slowed from a painful 2022 peak but is still growing uncomfortably fast, data released Tuesday showed, and higher price forces are proving stubborn in ways could make it difficult to raise costs back to the Federal Reserve’s target.

The consumer price index rose 6.4% in January from a year earlier, faster than economists had forecast and only down slightly from 6.5% in December. Annual growth has cooled from a peak of 9.1% in the summer of 2022, but the rate is still more than three times faster than pre-pandemic normal.

And prices continue to rise rapidly month after month as a variety of goods and services, including clothing, groceries, hotel rooms and rent, become more expensive. That’s true even after removing the cost of fuel and volatile foods.

Overall, the data highlights that while the Federal Reserve has received positive news that inflation is no longer accelerating relentlessly, it could be a long and bumpy road back to gains. 2% annual price used to be normal. For U.S. consumers, the current persistently rapid rate of inflation means everyday purchase prices are still rising at breakneck rates, potentially affecting the economic security of many households.

“We are certainly down from the peak of inflationary pressures last year, but we are lingering on the highs,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. “The road back to 2% will take some time.”

Stock prices fell in the hours following the report, and market expectations that the Fed would raise rates above 5% in the coming months rose slightly. Central banks raised borrowing costs from near zero this time last year to above 4.5%, a swift adjustment intended to slow consumer and business demand in an effort to keep it under control. price increase.

But the economy has so far held up against the central bank’s slowing campaign. Growth slowed last year, with the interest-sensitive housing market falling and demand for big purchases like autos weakening, but the job market remained strong and wages remained strong.

That could help keep the economy steady through 2023. Overall consumption has shown signs of a meaningful slowdown, but it could be poised for a comeback: Economists expect Retail sales data scheduled for release on Wednesday showed spending rose 2% in January after falling 1.1% in December, based on estimates in a Bloomberg survey.

Signs of continued economic momentum could combine with upcoming price data to convince the Fed that more needs to be done to fully control inflation, which could entail a push in interest rates. interest rates are higher than expected, or leave interest rates high for a longer period of time. Central banks have warned that the process of arguing over cost increases could be difficult and bumpy.

“There was an expectation that it would go away quickly and painlessly — and I don’t think that’s guaranteed at all,” said Jerome H. Powell, the Fed chair. speak at an event last week. “The base case for me is that it will take a while and we will have to raise rates more, then we will have to look around and see if we have done enough.”

A wide range of products and services drove inflation high in January: More expensive hotels, car insurance and auto repairs all contributed to the overall index rise.

Some items, including used cars and women’s clothing, have monthly discounts. Even so, the slowdown for some physical products is less pronounced than in the past. For example, price increases for apparel overall have accelerated.

Moderate price increases for commodities and commodities have fueled a general slowdown in inflation in recent months. Fed officials have accepted the cooling but also warned that it may not continue, because it comes as pandemic disruptions subside and tangled supply chains are untangled.

“Supply chains don’t recover twice,” said Lorie Logan, president of the Federal Reserve Bank of Dallas, said in a speech on Tuesday.

Used cars are a prime example of why the drag from price drops on some goods can be temporary. Used car prices are falling back to normal levels on the back of falling demand and rebounding supply, and that has helped to eliminate the overall price increase. But the cost of a used car is has started to increase again At the wholesale level, this shows that this trend is unlikely to last indefinitely.

That’s why central banks and economists are watching closely to see what happens to the prices of services, such as healthcare and restaurant meals, pedicures and pedicures. and tax accounting.

Service prices may prove to be more closely tied to the underlying dynamic in the economy: Labor is a major cost for many service firms, so businesses can charge more when the rate increases. unemployment is low and they have to raise wages to compete for workers.

So far, such inflation has shown little permissiveness. Service prices excluding energy continued to rise rapidly in January, partly due to soaring rents and other housing costs.

That rapid rent inflation is expected to ease in the coming months as the recent decline in rents for newly rented apartments is gradually included in official inflation data. But how much – and for how long – housing costs will fade is uncertain.

“There is a bit of uncertainty about the underlying dynamics of the haven,” said Sonia Meskin, head of US macro at BNY Mellon Investment Management. “Shelter tends to correlate with a tight labor market.”

Hiring activity in the US remains unusually strong, despite recent notable layoffs in the tech industry. Recruiter added more half a million jobs in January, an unexpectedly strong number, and profit in Average hourly earnings and other wage trackers are still growing rapidly, although they have begun to slow down.

The hard question for Fed officials is whether the labor market needs to weaken to bring inflation down. Many central banks have suggested that wage hikes are probably too hot to match 2% inflation, their official target. Central banks determine their inflation targets using a related but slower measure of inflation, the Personal Consumption Spending index.

“I don’t think they’ll feel comfortable until the labor market changes a little bit more,” said Michael Feroli, chief US economist at JP Morgan.

While some policymakers argue that the Fed should be careful not to constrain the labor market more than is necessary in its fight against inflation, the so-called “moderate” wing in policymaking of the central bank is about to lose a key member. President Biden is will do Lael Brainardthe central bank’s vice president, the new head of his National Economic Council, according to people familiar with the matter.

Ms. Brainard emphasized in recent speeches that the central bank can reduce inflation without slowing demand to the point of resulting in significant job losses. And she focused on causes of inflation outside the labor market, including soaring corporate profits and the aftershocks of high fuel prices.

But as she highlighted those hopeful reasons why the price hike might be moderate, many other Fed officials have focused more on the risk that services outside of housing will continue. growing at its current rate – making inflation too hot to be comfortable.

If that price measure “remains within the current range, while other categories return to pre-pandemic rates, total future inflation should stabilize near 3% much more than the 2nd target.” % of us,” said Logan from the Dallas Fed on Tuesday. Service inflation “is a symptom of an overheated economy, especially a tight labor market,” she explained.

John C. Williams, president of the Federal Reserve Bank of New York, said on Tuesday that controlling inflation “will likely entail a period of slowing growth and some subdued labor market conditions.” Go”.

Jason Furman, an economist at Harvard University and a former economic adviser to the Obama administration, said there is now growing evidence that inflation is not falling as quickly as economists and central bankers have said. was hoping even a month or two ago.

“It turned out that most of it was probably a false dawn,” said Mr Furman. “The whole outlook that we have on inflation is much worse.”