Inflation eased for the seventh straight month in January, as the annual rise in prices for goods and services slowed to 6.4%, helped by lower costs for used cars.
Compared with December, though, inflation last month rose by 0.5% from 0.1%, driven up by shelter costs.
The data comes after last month’s surprising jobs report found that employers hired 517,000 new workers, well exceeding economists’ expectations.
Americans have been struggling with high prices for over a year now, resulting in a decline in the real value of their income despite historic wage increases. High inflation has also amplified the risk of a recession.
The report “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, he said. To get there, the Fed will likely have to continue hiking rates higher and longer than many anticipated.
Core CPI
Core CPI, a measure of inflation that strips away volatile food and energy prices, rose last month by 0.4% from December’s 0.3% increase. That put the annual core CPI inflation rate at 5.6%.
Housing costs drove inflation higher
Rising shelter costs were the biggest contributor to rising inflation last month and yea, accounting for half of the 0.5% monthly increase in prices and 60% of the 6.4% annual inflation rate, the Labor Department said. Shelter costs rose by 0.7% last month and are up 7.9% from a year ago.
“Shelter’s contribution to inflation is likely to slow in the coming months,” said Leer.
Inflation may have peaked, but it’s not showing signs rapidly returning to the Fed’s long-run goal of 2 percent. Shelter’s contribution to inflation is likely to slow in the coming months, but there remain upside risks to durable goods prices. Despite all of the challenges facing the U.S. consumer, demand remains too strong relative to supply. The fight against inflation is far from over.”
What’s different about CPI in January?
New changes went into effect last month to adjust for shifting consumer spending patterns. By design, CPI takes into account price increases for more than 200 categories as well as the portion of the typical Americans’ budget they take up.
This is done so that the overall CPI reflects the proportional price changes consumers experience. Without taking consumers’ budgets into account the 70% increase in the price for a carton of eggs from a year ago could disproportionately skew the overarching inflation data.
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Ahead of January’s CPI release the Bureau of Labor Statistics, published new weights for certain categories, a process it undergoes every two years. Moving forward, it will update the weights every year.
With the new changes, housing accounts for 44.4% of CPI, up from 42.4%. That reflects an increase in weight for shelter to 34.4% from 33.3% and rent, also known as owners’ equivalent rent (OER), which rose to 25.4% from 24.3%.
“At the moment, OER is still running hot so a higher weight will likely keep some upward pressure on core CPI in the near term,” said Deutsche Bank economist Jim Reid.
Meanwhile, food’s weighting fell to 13.5% from 13.9%.
Stock market futures
Stocks were little changed after the release of the report. Futures traded for the Dow Jones Industrial Average are up slightly.
What January’s inflation data means for the Fed
Although the Federal Reserve doesn’t reconvene for another month, Tuesday’s CPI report combined with the latest jobs report will likely lead the Fed to raise interest rates by 25 basis points for the second time this year.
The report likely won’t give the Fed enough confidence that inflation will continue to ease on its own for it to stop raising interest rates.
10-year Treasury
Yields for 10-year Treasury notes climbed after the report was released. They’re trading above 3.7%, near the highs for the month.
Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here