Inflation unexpectedly accelerated in January, with prices rising faster than expected as the new year began.
The Consumer Price Index, the Labor Department’s broad measure of how much consumers pay for goods and services, rose 3.1% from a year earlier.
Economists had expected a 3.0% increase from the previous year. The inflation rate for the 12 months ended December was 3.4%.
Compared to the previous month, CPI increased by 0.3%. Economists expected inflation to rise 0.2%, the same as the rate reported in December.
Fed officials said they were looking at several months’ worth of data to look for inflation trends. The three-month annualized inflation rate rose to 4% from 3.3% in January. The six-month annualized rate rose from 3.2% to 3.6%. Both points to rising inflation well above levels that the Fed says are compatible with a healthy economy.
The monthly inflation rate is 4.8% annually, which shows how high the monthly inflation rate is. In other words, if inflation continued at the same pace as January for 12 months, the annual inflation rate would be 4.8%.
Consumer inflation reached a recent peak of 9.2% in June 2022, but the Biden administration is under pressure from lawmakers worried about the Federal Reserve raising interest rates at a record pace and unusually large budget deficits. It has since retreated as spending has been reined in. Disruptions in supply chains are a major cause of inflation in commodity prices.
Despite the expiration of the pandemic stimulus package and the Biden administration’s post-pandemic spending through the American Rescue Plan and the Control Inflation Act, the federal government continues to run very large budget deficits. This highly expansionary fiscal policy is likely to significantly reduce the effectiveness of interest rate increases and keep inflation high.
Core prices, which exclude food and energy prices, rose 0.4%, compared with analysts’ expectations for a 0.3% rise and the 0.3% increase announced in December. Compared to 1 year ago, core price increased by 3.9 percent. Economists had expected a 3.7% increase. Core prices rose 3.9% for the year in December.
Markets had been pricing in a Federal Reserve interest rate cut in May, but the probability implied by market prices has declined over the past week. Following the CPI data, the probability of a May interest rate cut has dropped to about 35%.
Markets had priced in a near certainty of a rate cut by the June meeting. The probability of a June interest rate cut fell to about 76% immediately after the release of the CPI data. A few weeks ago, the market was pricing in six cuts for the year. Currently, the market seems to be expecting four rate cuts, but a fifth rate cut is highly likely.
The following are likely reasons why major stock indexes fell sharply after the news about inflation was released.
Food prices rose 0.4% in January; At the end of last year, price increases were fairly modest at 0.1% for groceries and 0.3% for restaurants. Food prices rose by 2.6% over the past year.
Energy prices in January fell 0.9% from the previous month, pushing down the overall index. The energy index decreased by 4.6% from the previous year.
Commodity prices continued to fall, and the overall index eased. Prices of goods excluding energy products fell by 0.3% in January, the third consecutive month of decline. Compared to 12 months ago, core goods prices have fallen by 0.3%.
Service prices are rising rapidly. Prices for services rose 0.7% in January, the fastest pace since September 2022 and inflation near the peak of that year. Compared to a year ago, the price of core services has increased by his 5.4%.
Although the Fed closely monitors the CPI, it uses another measure, the Personal Consumption Expenditures (PCE) price index, as its official measure of price stability. The goal is to increase the PCE index by 2% annually. In December, the PCE price index increased by 2.6%, and the core PCE price increased by 2.9%.
