WASHINGTON — Inflation has slowed from its painful peak in 2022 but remains uncomfortably rapid, data released Tuesday showed, pushing prices upwards proving stubborn. , which could make it difficult to work to raise costs back toward the Federal Reserve’s goals.
The consumer price index rose 6.4% year-on-year in January, faster than economists had expected, decelerating slightly from 6.5% in December. The pace of annual growth has slowed from his peak of 9.1% in the summer of 2022, but remains more than three times his typical pre-pandemic rate.
Prices also continued to rise rapidly month after month as the prices of various goods and services increased, including apparel, groceries, hotel rooms, and rent. That was true even after removing the volatile food and fuel costs.
Overall, the data show that while the Federal Reserve is receiving positive news that inflation is no longer relentlessly accelerating, it will be a long and steep return to the previously normal 2% annual price increase. The price of everyday shopping is still rising, threatening the financial stability of many families.
“It’s definitely down from last year’s peak in inflationary pressures, but it’s still rising,” said Laura Rosner-Warburton, senior economist at Macropolicy Perspectives. “It will take time to get back to 2%,” she said.
Stocks fell hours after the report, slightly increasing market expectations that the Fed would raise interest rates above 5% in the coming months. The central bank has already raised borrowing costs from almost zero a year ago to more than 4.5% for him, a steep rise meant to slow consumer and business demand to contain and cope with inflation. adjustment.
But so far the economy has held up despite central bank campaigns for a slowdown. Growth slowed last year as the interest rate-sensitive housing market weakened and demand for big purchases such as cars fell, but the job market remains strong and wages are still rising strongly.
This could help sustain the economic momentum into 2023. Overall consumption was showing signs of slowing down significantly, but may be poised for a recovery. Economists said retail sales data due out Wednesday, based on estimates from a Bloomberg survey, show spending rose 2% in January after he fell 1.1% in December. I expect.
Signs of continued economic momentum, combined with upcoming price data, could convince the Fed that it needs to do more to keep inflation under control. Central bankers have warned that the process around raising costs could be difficult and arduous.
Inflation FAQ
What is inflation? Inflation is the loss of purchasing power over time. So your dollar won’t go as well tomorrow as it did today. It is usually expressed as annual changes in the prices of commodities and services such as food, furniture, apparel, transportation and toys.
“There was hope that it would go away quickly and painlessly, but I don’t see that as a guarantee,” Federal Reserve Chairman Jerome H. Powell said at an event last week. rice field. “The basic scenario for me is that it will take time, we need to do more rate hikes, and then we have to look around and see if we have done enough.”
A wide range of products and services held up January inflation. More expensive hotels, car insurance and auto repair all contributed to the overall index gains.
Some items, such as second-hand cars and women’s clothing, fell in price month by month. Still, the slowdown in some physical products wasn’t as pronounced as it used to be. For example, price hikes across apparel accelerated.
Moderate gains in commodity and commodity prices have eased overall inflation in recent months. Fed officials are embracing the cooldown, but warn it may not continue as the chaos of the pandemic fades and complex supply chains unravel.
“The supply chain cannot recover twice,” said Dallas Federal Reserve Bank President Rory Logan. said in a speech on tuesday.
Used cars are a good example of why the impact of falling prices on some commodities is temporary. Weak demand and rebounding supply have brought used car prices back to normal levels, which has taken a toll on overall price gains.However, used car prices already starting to recover again At the wholesale level, this trend is unlikely to continue indefinitely.
As such, central banks and economists are closely watching what happens to the prices of services such as healthcare, restaurant meals, pedicures and tax accounting.
Service prices could prove to be more closely tied to the underlying momentum of the economy. Labor is a major cost for many service firms, so firms may charge more when unemployment is low and wages need to be raised to attract workers.
So far, such inflation has shown little sign of abating. Non-energy service prices continued to rise sharply in January due to a surge in rent and other housing costs.
That rapid rent inflation is expected to abate in the coming months as the recent cuts in demand for rents on newly rented apartments are gradually reflected in official inflation data. However, it is unclear to what extent and how long housing costs will rise.
Understanding Inflation and How It Affects You
“It’s a bit unclear what kind of momentum there is in the retreat,” said Sonia Meskin, head of U.S. macro at BNY Mellon Investment Management, adding that strong job gains and solid wage growth are expected. He said it could continue to put pressure on the market. “Refuges tend to correlate with tighter labor markets.”
Despite recent high-profile layoffs in the tech industry, hiring in America is still very strong. Employers said he added more than 500,000 jobs in January. This is an unexpectedly solid number. the profit of Average hourly wages and other payment trackers are starting to slow down, but are still fast.
An uncomfortable question facing Federal Reserve officials is whether the labor market needs to be undermined to keep inflation in check. Many central bankers have suggested that wage hikes are probably too high to match their official 2% inflation target. Central banks use the Personal Consumption Expenditure Index, a related but lagging measure of inflation, to define their inflation target.
“I doubt they will feel safe until the labor market shifts a little more decisively,” said Michael Feroli, chief U.S. economist at JPMorgan.
While some policymakers have argued that the Fed needs to be careful not to constrain the labor market more than necessary in its fight against inflation, so-called doves in the central bank’s policy-making set It is poised to lose a key member. President Biden plans to name Federal Reserve Vice Chairman Lael Brainard as the new chairman of the National Economic Council, according to people familiar with the matter. is.
In a recent speech, Mr. Brainard emphasized that central banks may be able to tackle inflation without slowing demand too much, leading to significant job losses. She also looks at inflation drivers beyond the labor market, such as rising corporate earnings and the aftermath of high fuel prices.
But just as she highlighted a promising reason that inflation could moderate, many other Fed officials were more enthusiastic about the risk that non-housing services could continue to rise at their current pace. is focused on
Dallas Fed’s Logan said Tuesday that if price indicators “remain in their current range and other categories return to their pre-pandemic pace, headline inflation going forward will settle closer to 3%, well below the 2% target.” will,” he warned. She explained services inflation “as a sign of an overheating economy, especially a tight labor market.”
New York Federal Reserve Bank President John C. Williams said on Tuesday that curbing inflation “is likely to be accompanied by a period of slower growth and some softening in labor market conditions.”
For now, inflation is not declining as quickly as economists and central bank officials had hoped a month or two ago, said Jason Furman, a Harvard economist and former economic adviser to the Obama administration. There is increasing evidence that
“A lot of it turned out to be probably a false dawn,” Furman said. “The overall view we have of inflation is much worse.”