In January, inflation eased for the seventh straight month, thanks to lower used car prices and some relief for consumers struggling with high prices over the past year. Consumer price index data released on Tuesday showed that prices for goods and services rose 6.4% over the past 12 months, down slightly from a 6.5% annual increase in December and a 9.1% high in June.
On a month-by-month basis, however, prices increased by 0.5% in January compared to a 0.1% gain in December. The acceleration was driven by shelter costs.
Due to soaring prices last year, Americans have seen their real income decline despite historic wage increases. High inflation has also amplified the risk of a recession.
It follows the labor report of last month, which showed employers added 517,000 jobs, exceeding expectations and raising concerns that prices will remain elevated for too long if the economy remains too hot. “The latest index news underscores the challenges faced by the Fed,” said John Leer, chief economist at Morning Consult. “Inflation may have peaked, but it’s not showing signs of rapidly returning to the Fed’s 2% inflation target.”
A big jump in shelter prices could mean smaller increases in coming months, according to Gregory Daco, chief economist at EY.
Inflation will decline to 2.3% this year, and core inflation to 2.8% by the end of the year, according to Daco.
Last month and last year, shelter costs contributed the most to rising inflation, accounting for half of the 0.5% increase in prices and 60% of the 6.4% annual increase, according to the Labor Department. A year ago, shelter costs rose 7.9%, and last month they increased by 0.7%.
Changes went into effect last month to adjust for shifting consumer spending patterns. By design, the index takes into account price increases for more than 200 categories, as well as the portion of the typical Americans’ budget that they take up. This is done so that the overall index reflects the proportional price changes that consumers experience.
According to the new changes, housing makes up 44.4% of the index. The weight for shelter rose from 33.3% to 34.4%, while the weight for rent, also known as owner’s equivalent rent, increased from 24.3% to 25.4%. A higher weight on OER will likely keep some upward pressure on core CPI in the near term, according to Deutsche Bank economist Jim Reid.
In contrast to recent layoff announcements and consumer spending and industrial production data, he noted that the latest jobs report puts the economy in a positive light. In deciding how much more interest rates should be raised this year, the Fed will take into account the balance of signals from these data.
In contrast to recent layoff announcements and consumer spending and industrial production data, he noted that the latest jobs report puts the economy in a positive light. In deciding how much more interest rates should be raised this year, the Fed will take into account the balance of signals from these data.
Biden said the inflation data was “good news for families and businesses across the country.” He acknowledged that there is still work to be done to lower prices and that setbacks could occur. The Fed’s preferred measure of inflation, the Personal Consumption Expenditures price index, is due to release on February 24. On March 14, the next consumer price index report will be released.
