Inflation continued to remain high in January, according to the latest Consumer Price Index (CPI) report from the Bureau of Labor Statistics.[0] The index rose 0.5% from the prior month, and 6.4% from January of last year.[1] This was slightly below the 6.5% reading in December, though still above the Federal Reserve’s 2% target.[2] Core inflation, which excludes food and energy, also ticked up slightly to 0.4%, compared with 0.3% in December.[3]
January saw an increase in core inflation due to higher prices of shelter, motor vehicle insurance, and apparel.[0] Shelter costs, which accounts for about 40% of the core inflation increase, rose the most since 1982, with rent costs increasing 8%.[4] Energy prices also rose 2.0% on the month, rebounding from consecutive declines in November and December.[5]
With inflation still above the Fed target and the pace of declines in the inflation slowing, Federal Reserve Chair Jerome Powell has hinted that disinflation has begun, but there is still a long way to go to reach the central bank’s desired 2.0% rate.[6] Powell has said that the Fed will need to do further rate increases and hold policy at a restrictive stance for a period of time. Markets are anticipating two additional rate hikes of 25 basis points each at the March and May meetings of the Federal Open Market Committee (FOMC).[7]
Analysts believe that inflation could be back to target by the end of the year, as increases in energy prices that followed Russia’s invasion of Ukraine are unlikely to be repeated this year. Core services prices, excluding housing and healthcare, have averaged a 5.8% annualized inflation rate over the last three months.[0]
The latest CPI report presents more challenges for the Fed, as markets are now expecting the federal-funds effective rate to rise to 5.50% this summer, up from a high of 5.25% that was widely expected earlier in the month.[0] The Fed will have to be more aggressive in raising interest rates to tame inflation and maintain the 2% target.
0. “January CPI Report Shows Sticky Inflation Is Back” Morningstar, 14 Feb. 2023, https://www.morningstar.com/articles/1137589/january-cpi-report-shows-sticky-inflation-is-back
1. “Inflation Jumps More Than Expected in January” Washington Free Beacon, 14 Feb. 2023, https://freebeacon.com/latest-news/inflation-jumps-more-than-expected-in-january/
2. “Consumer prices rise at faster pace in January” Axios, 14 Feb. 2023, https://www.axios.com/2023/02/14/cpi-january-inflation-report-2023
3. “Inflation is higher than expected at 6.4%, with the ‘most important’ measure remaining elevated” CNBC, 14 Feb. 2023, https://www.cnbc.com/2023/02/14/inflation-higher-than-expected-in-january.html
4. “January inflation breakdown: Where are prices rising the fastest?” Fox Business, 14 Feb. 2023, https://www.foxbusiness.com/markets/inflation-breakdown-prices-for-everyday-items
5. “Consumer Prices Rose More Than Expected in January” Investopedia, 14 Feb. 2023, https://www.investopedia.com/consumer-prices-rose-more-than-expected-in-january-2023-7109395
6. “Inflation rose 0.5% in January, more than expected and up 6.4% from a year ago” CNBC, 14 Feb. 2023, https://www.cnbc.com/2023/02/14/consumer-price-index-january-2023-.html
7. “Inflation eased again in January – but there’s a cautionary sign” MPR News, 14 Feb. 2023, https://www.mprnews.org/story/2023/02/14/npr-inflation-prices-recession-economy-federal-reserve